At what point is this a bubble?

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fortyofforty
Posts: 1979
Joined: Wed Mar 31, 2010 12:33 pm

Re: At what point is this a bubble?

Post by fortyofforty » Mon Feb 17, 2020 6:46 pm

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
[W]hen is it a bubble and time to take some money off the table?
I sincerely wish I knew. Sincerely. If I did I would be running a hedge fund, sipping expensive drinks around an impossible pool, enjoying my private island life. The sad key is that nobody knows. Nobody. Everyone is guessing. The only smart course is to act as if nobody knows and keep investing accordingly.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Out of self-quarantine.

mptfan
Posts: 5873
Joined: Mon Mar 05, 2007 9:58 am

Re: At what point is this a bubble?

Post by mptfan » Tue Feb 18, 2020 10:54 am

Caduceus wrote:
Mon Feb 17, 2020 6:25 pm
mptfan wrote:
Mon Feb 17, 2020 3:06 pm
PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?
Define "bubble."
I think it's a tricky question but in some senses also an unfair one.
I think it is a very fair question. If you want to know if something is a bubble but you cannot define what a bubble is, then the question itself cannot be answered.

Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

Re: At what point is this a bubble?

Post by Caduceus » Wed Feb 19, 2020 6:25 pm

mptfan wrote:
Tue Feb 18, 2020 10:54 am
Caduceus wrote:
Mon Feb 17, 2020 6:25 pm
mptfan wrote:
Mon Feb 17, 2020 3:06 pm
PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?
Define "bubble."
I think it's a tricky question but in some senses also an unfair one.
I think it is a very fair question. If you want to know if something is a bubble but you cannot define what a bubble is, then the question itself cannot be answered.
OK. So, how would you define "bubble" then, especially as far as equities are concerned? When their prospective returns fall below that of government credits? Or something else? Or equities can never be in a bubble?

Lee_WSP
Posts: 2149
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: At what point is this a bubble?

Post by Lee_WSP » Wed Feb 19, 2020 6:31 pm

The Nasdaq definitely is starting to look like a 1999 bubble. However, there's nothing I will do about it so... cest la vie. :sharebeer

Because even if I'm right, I don't know when it'll pop or what it'll pop down to. For all I know it'll pop to today's valuation.

bluquark
Posts: 1043
Joined: Mon Oct 22, 2018 2:30 pm

Re: At what point is this a bubble?

Post by bluquark » Wed Feb 19, 2020 6:39 pm

Here's one potential definition of bubble in public equities specifically: when implied equity risk premium (a complicated calculation incorporating especially forward P/E and interest rates) falls below 3%. That last happened during the 90s tech bubble.

Whether you call that (very rare) scenario a "bubble" or not, I plan to change my AA to hold less equities if it happens. Because it would be irrational to bear the same risk with less return. We would all hold zero equities if their expected return was the same as bonds, so we should also hold proportionately less of them if their return approaches that of bonds.

Currently, Damodaran's February 2020 ERP calculation is above 5% as usual, so I think all the talk about valuations being too high is just handwaving from people who haven't backed their intuition with rigorous math.

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gmaynardkrebs
Posts: 1984
Joined: Sun Feb 10, 2008 11:48 am

Re: At what point is this a bubble?

Post by gmaynardkrebs » Wed Feb 19, 2020 7:10 pm

When is it a bubble? When virtually all of the earnings per share growth is from buybacks. We are pretty close to that now.

mptfan
Posts: 5873
Joined: Mon Mar 05, 2007 9:58 am

Re: At what point is this a bubble?

Post by mptfan » Wed Feb 19, 2020 7:12 pm

Caduceus wrote:
Wed Feb 19, 2020 6:25 pm
OK. So, how would you define "bubble" then, especially as far as equities are concerned? When their prospective returns fall below that of government credits? Or something else? Or equities can never be in a bubble?
I didn't ask the question and I didn't use the word so I don't have to define it. I don't think the question seeks useful or actionable information, and the fact that the person asking the question cannot define the term proves my point.

Puretaxableindexer
Posts: 218
Joined: Sun Feb 16, 2020 8:05 pm

Re: At what point is this a bubble?

Post by Puretaxableindexer » Thu Feb 20, 2020 10:48 am

No one can pick tops or bottoms that's why asset allocation is extremely important and regular re-balancing is a part of AA.

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