Bear Cub Smells Bubble

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TheTimeLord
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Re: Bear Cub Smells Bubble

Post by TheTimeLord »

fredflinstone wrote: Tue Sep 01, 2020 10:44 am
BogleFan510 wrote: Wed Aug 26, 2020 12:38 pm As I read the OP, a few ideas came to my mind that I am sharing to try to keep minds open to a different way of looking at market valuations for companies like Apple.

My thoughts:
The value of equities, as reflected in stock indexes is a sort of proxy for the cumulative 'Global Balance Sheet' of incorporated assets held. The values also our aggregated assumptions about the future income to be generated by those assets, respectively.

If you look at the 'global balance sheet' of economic activity, there are some long term trends which have recently hit inflection points such that the wealth creation potential of the two 'sheets' above are dramatically changed. A few of the top trends are:

----- Capital markets are global. Money moves efficiently to its best use, faster and faster. This is a key factor behind the rapid economic rise of China. US, EU, and Japanese and Western capital flowed there despite political barriers, transforming the country. As Kenichi Ohmae argued in his book The Borderless World the late 80s, one can argue, large nation states have very little power over their own currency anymore.

----- Trading markets are defacto global. Incredibly efficient global supply chains are creating very efficient product and service markets. The impact for companies is an incredible pressure to 'win,' which is both harder and exponentially more profitable. This over time, wealth will concentrate in the winning global supply chain platforms. Well positioned companies will accumulate historically disproportionate wealth.

----- Information capital has emerged as increasingly important to corporate balance sheets. When I researched asset based value creation on the 80s and 90s, I classified the wealth creating assets of corporations within 5 categories: 1) physical capital (e.g. trucks, land); 2) financial capital (e.g. currency, debt instruments, stocks, related contracts), 3) human capital (e.g. skilled labor, education), 4) information capital (e.g. data, patents, process knowledge), and 5) brand/habitual capital (manifests as consumer and b2b habits and 'sticky' relationships, like those built via marketing strategies. Over time the relative value of information capital as the key to wealth creation has dramatically changed our economic system. Two interesting differences: information is fundamentally 'not scarce' as long as distribution systems like networks exist, and the `marginal cost of production' of information while formerly very expensive is exponentially trending towards zero. So in the global balance sheet, if you measure the percentage of the 5 asset types, trucks, people, money, etc are mostly similar, but the amount/value in information and brand/habit are ballooning. This is because if you have the information and brand edge, in an industry like Apple or Google's core markets, you print money. Your key asset has a marginal cost trending down and your market for sales and profit is global, sticky and trending towards monopoly power (if you can sustain it).

----- Commoditization of global markets. Where scarce assets create no proprietary advantages, competition for capital is driving scale economies and production efficiency to historic levels. Since information flows globally, the best ideas are allowed to rapidly create efficiency where inefficient production models used to be allowed to persist. This is taking time as political forces still get in the way, but over time seems inevitable.

So, I believe the valuations we are seeing reflect these changes in the global economy. Traditional measures such as 10 yr avg P\E are not the right way to look at a changing global supply chain and market landscape.

* Key industries will continue to globalize
* The most efficient global supply chains will trend toward monopolies
* Information intensive industries (if proprietary) be hugely profitable
(as they benefit from decreasing marginal costs of production and scale economies... e.g. web apps, pharma, software; hence the best investments, if among the winners)
* Industries without scarce asset advantages to protect profits will be squeezed by global efficiency forces, with value flowing directly to consumers vs becoming profits.

Just my thoughts as I read OP. My personal opinion is that bubbles are the new normal. I also believe that financial capital may not be a scarce thing in the future, so it may not matter as much as it has been in the past, which could be bad news for investors, but there will be a lot of wealth created for consumers, so we all should be ok. A lot depends on if the future' big winners' use public markets to finance their companies or not. That said, no other game in town to play.
Thank you. Good, thoughtful post arguing that the Internet economy creates winner-take-all competition. Of course, similar arguments were made about MySpace, Yahoo!, AOL, and Netscape back in the day.

I would like to point out that the flip side of highly efficient, very lean supply chians is vulnerability to supply chain disruptions, such as those that occurred this year due to the coronavirus pandemic.

I'm curious, since you mentioned Apple, how vulnerable you think Apple is to competition in the smartphone segment. The company hasn't really innovated much since Steve Jobs died. It's top seller, iPhones, is becoming a commodity. If you believe, as I do, that consumers will be doing some belt-tightening in the coming years, won't lower-cost phone makers (such as those using the Android operating system) benefit at Apple's expense? I jsut can't see consumers shelling out $700 or more for a new phone every 2 or 3 years when much less expensive alternatives are available. If I'm right, doesn't Apple's current P/E ratio (about 40) seem pretty high?
Canard. (Edited)
Last edited by TheTimeLord on Tue Sep 01, 2020 11:27 am, edited 1 time in total.
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PicassoSparks
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Re: Bear Cub Smells Bubble

Post by PicassoSparks »

I read recently that the average lifespan of a company in the S&P 500 has been steadily shrinking (I can't find the article and I wish I'd done a better job of saving it). Intuitively it makes sense though. If we live by the sword and believe in the power of explosive disruption justifying the current crop of rising stars, we should expect to die by the sword when the next crop of explosive winners comes along.
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fredflinstone
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Re: Bear Cub Smells Bubble

Post by fredflinstone »

TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
fredflinstone wrote: Tue Sep 01, 2020 10:44 am
BogleFan510 wrote: Wed Aug 26, 2020 12:38 pm As I read the OP, a few ideas came to my mind that I am sharing to try to keep minds open to a different way of looking at market valuations for companies like Apple.

My thoughts:
The value of equities, as reflected in stock indexes is a sort of proxy for the cumulative 'Global Balance Sheet' of incorporated assets held. The values also our aggregated assumptions about the future income to be generated by those assets, respectively.

If you look at the 'global balance sheet' of economic activity, there are some long term trends which have recently hit inflection points such that the wealth creation potential of the two 'sheets' above are dramatically changed. A few of the top trends are:

----- Capital markets are global. Money moves efficiently to its best use, faster and faster. This is a key factor behind the rapid economic rise of China. US, EU, and Japanese and Western capital flowed there despite political barriers, transforming the country. As Kenichi Ohmae argued in his book The Borderless World the late 80s, one can argue, large nation states have very little power over their own currency anymore.

----- Trading markets are defacto global. Incredibly efficient global supply chains are creating very efficient product and service markets. The impact for companies is an incredible pressure to 'win,' which is both harder and exponentially more profitable. This over time, wealth will concentrate in the winning global supply chain platforms. Well positioned companies will accumulate historically disproportionate wealth.

----- Information capital has emerged as increasingly important to corporate balance sheets. When I researched asset based value creation on the 80s and 90s, I classified the wealth creating assets of corporations within 5 categories: 1) physical capital (e.g. trucks, land); 2) financial capital (e.g. currency, debt instruments, stocks, related contracts), 3) human capital (e.g. skilled labor, education), 4) information capital (e.g. data, patents, process knowledge), and 5) brand/habitual capital (manifests as consumer and b2b habits and 'sticky' relationships, like those built via marketing strategies. Over time the relative value of information capital as the key to wealth creation has dramatically changed our economic system. Two interesting differences: information is fundamentally 'not scarce' as long as distribution systems like networks exist, and the `marginal cost of production' of information while formerly very expensive is exponentially trending towards zero. So in the global balance sheet, if you measure the percentage of the 5 asset types, trucks, people, money, etc are mostly similar, but the amount/value in information and brand/habit are ballooning. This is because if you have the information and brand edge, in an industry like Apple or Google's core markets, you print money. Your key asset has a marginal cost trending down and your market for sales and profit is global, sticky and trending towards monopoly power (if you can sustain it).

----- Commoditization of global markets. Where scarce assets create no proprietary advantages, competition for capital is driving scale economies and production efficiency to historic levels. Since information flows globally, the best ideas are allowed to rapidly create efficiency where inefficient production models used to be allowed to persist. This is taking time as political forces still get in the way, but over time seems inevitable.

So, I believe the valuations we are seeing reflect these changes in the global economy. Traditional measures such as 10 yr avg P\E are not the right way to look at a changing global supply chain and market landscape.

* Key industries will continue to globalize
* The most efficient global supply chains will trend toward monopolies
* Information intensive industries (if proprietary) be hugely profitable
(as they benefit from decreasing marginal costs of production and scale economies... e.g. web apps, pharma, software; hence the best investments, if among the winners)
* Industries without scarce asset advantages to protect profits will be squeezed by global efficiency forces, with value flowing directly to consumers vs becoming profits.

Just my thoughts as I read OP. My personal opinion is that bubbles are the new normal. I also believe that financial capital may not be a scarce thing in the future, so it may not matter as much as it has been in the past, which could be bad news for investors, but there will be a lot of wealth created for consumers, so we all should be ok. A lot depends on if the future' big winners' use public markets to finance their companies or not. That said, no other game in town to play.
Thank you. Good, thoughtful post arguing that the Internet economy creates winner-take-all competition. Of course, similar arguments were made about MySpace, Yahoo!, AOL, and Netscape back in the day.

I would like to point out that the flip side of highly efficient, very lean supply chians is vulnerability to supply chain disruptions, such as those that occurred this year due to the coronavirus pandemic.

I'm curious, since you mentioned Apple, how vulnerable you think Apple is to competition in the smartphone segment. The company hasn't really innovated much since Steve Jobs died. It's top seller, iPhones, is becoming a commodity. If you believe, as I do, that consumers will be doing some belt-tightening in the coming years, won't lower-cost phone makers (such as those using the Android operating system) benefit at Apple's expense? I jsut can't see consumers shelling out $700 or more for a new phone every 2 or 3 years when much less expensive alternatives are available. If I'm right, doesn't Apple's current P/E ratio (about 40) seem pretty high?
Cunard.
What does this mean?
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HomerJ
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Re: Bear Cub Smells Bubble

Post by HomerJ »

fredflinstone wrote: Tue Sep 01, 2020 11:07 am
TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
Cunard.
What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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TheTimeLord
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Re: Bear Cub Smells Bubble

Post by TheTimeLord »

HomerJ wrote: Tue Sep 01, 2020 11:25 am
fredflinstone wrote: Tue Sep 01, 2020 11:07 am
TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
Cunard.
What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
Sorry, spelling error. Canard.
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texasfight
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Re: Bear Cub Smells Bubble

Post by texasfight »

Blowout ISM. Fed buying long end today to prevent curve steepening. It is almost like they want to blow an asset bubble. :wink:
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dziuniek
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Re: Bear Cub Smells Bubble

Post by dziuniek »

something, something ... the market can stay irrational longer than you remain solvent.

Ha.
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dogagility
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Re: Bear Cub Smells Bubble

Post by dogagility »

Robot Monster wrote: Tue Sep 01, 2020 9:30 am Doesn't Tesla have to dominate the entire car industry at this point in order to justify its valuation?
Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution.
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TheTimeLord
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Re: Bear Cub Smells Bubble

Post by TheTimeLord »

dogagility wrote: Tue Sep 01, 2020 11:35 am
Robot Monster wrote: Tue Sep 01, 2020 9:30 am Doesn't Tesla have to dominate the entire car industry at this point in order to justify its valuation?
Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution.
Plus an autonomous driving fleet, plus leading supplier of battery technology for autos and homes.
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dogagility
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Re: Bear Cub Smells Bubble

Post by dogagility »

TheTimeLord wrote: Tue Sep 01, 2020 11:37 am
dogagility wrote: Tue Sep 01, 2020 11:35 am
Robot Monster wrote: Tue Sep 01, 2020 9:30 am Doesn't Tesla have to dominate the entire car industry at this point in order to justify its valuation?
Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution.
Plus an autonomous driving fleet, plus leading supplier of battery technology for autos and homes.
:beer
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
grettman
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Re: Bear Cub Smells Bubble

Post by grettman »

TheTimeLord wrote: Tue Sep 01, 2020 11:37 am
dogagility wrote: Tue Sep 01, 2020 11:35 am
Robot Monster wrote: Tue Sep 01, 2020 9:30 am Doesn't Tesla have to dominate the entire car industry at this point in order to justify its valuation?
Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution.
Plus an autonomous driving fleet, plus leading supplier of battery technology for autos and homes.

I can see the eventual charging stations worldwide. But until we get the flying car I was promised as a kid, I refuse to fall for the autonomous driving fleet....
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fredflinstone
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Re: Bear Cub Smells Bubble

Post by fredflinstone »

TheTimeLord wrote: Tue Sep 01, 2020 11:27 am
HomerJ wrote: Tue Sep 01, 2020 11:25 am
fredflinstone wrote: Tue Sep 01, 2020 11:07 am
TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
Cunard.
What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
Sorry, spelling error. Canard.
why is it a canard?
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BogleFan510
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Re: Bear Cub Smells Bubble

Post by BogleFan510 »

PicassoSparks wrote: Tue Sep 01, 2020 10:57 am I read recently that the average lifespan of a company in the S&P 500 has been steadily shrinking (I can't find the article and I wish I'd done a better job of saving it). Intuitively it makes sense though. If we live by the sword and believe in the power of explosive disruption justifying the current crop of rising stars, we should expect to die by the sword when the next crop of explosive winners comes along.
This is consistent with trends, IMHO. My personal view is that smart CEOs will treat companies like a lottery ticket. All in for massive payoff or fail may be the rational strategy (in certain information and habit/brand intensive industries). A previous post mentioned some of the great try/failed tech companies and brands that also tried to win. I dont pretend to know how to predict future winners or which juggernaut will next prove vulnerable to disintermediation by a newcomer with a superior value proposition. For example, Sun (which I owned and collaborated with, at times professionally) had great engineers and vision but got swallowed up.

It is one reason I hold mostly indexes and fewer stocks now.
Last edited by BogleFan510 on Tue Sep 01, 2020 1:19 pm, edited 1 time in total.
Robot Monster
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Re: Bear Cub Smells Bubble

Post by Robot Monster »

fredflinstone wrote: Tue Sep 01, 2020 11:46 am
TheTimeLord wrote: Tue Sep 01, 2020 11:27 am
HomerJ wrote: Tue Sep 01, 2020 11:25 am
fredflinstone wrote: Tue Sep 01, 2020 11:07 am
TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
Cunard.
What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
Sorry, spelling error. Canard.
why is it a canard?
This conversation is like something outta Samuel Beckett.
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BogleFan510
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Re: Bear Cub Smells Bubble

Post by BogleFan510 »

dogagility wrote: Tue Sep 01, 2020 11:35 am
Robot Monster wrote: Tue Sep 01, 2020 9:30 am Doesn't Tesla have to dominate the entire car industry at this point in order to justify its valuation?
Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution.
IMHO the value play is partnering with Google to disintermediate the all-in auto cost of the insurance industry by self insuring risk on self driving fleet. Also applies to superior service delivery costs of public transit (especially on demand disabled transit) and private transport (cabs, Lyft, etc.). Maybe minimum 5-10 years out, but huge, if solved. A good question is what is the size of auto repair, insurance and transit industries and how much is a 10% loss reduction worth, 50% worth, etc.?
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Re: Bear Cub Smells Bubble

Post by nisiprius »

fredflinstone wrote: Tue Sep 01, 2020 11:46 am
TheTimeLord wrote: Tue Sep 01, 2020 11:27 am
HomerJ wrote: Tue Sep 01, 2020 11:25 am
fredflinstone wrote: Tue Sep 01, 2020 11:07 am
TheTimeLord wrote: Tue Sep 01, 2020 10:52 am
Cunard.
What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
Sorry, spelling error. Canard.
why is it a canard?
Because the propellers are in the rear.
Image
Last edited by nisiprius on Tue Sep 01, 2020 7:46 pm, edited 1 time in total.
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TheTimeLord
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Re: Bear Cub Smells Bubble

Post by TheTimeLord »

nisiprius wrote: Tue Sep 01, 2020 7:45 pm
fredflinstone wrote: Tue Sep 01, 2020 11:46 am
TheTimeLord wrote: Tue Sep 01, 2020 11:27 am
HomerJ wrote: Tue Sep 01, 2020 11:25 am
fredflinstone wrote: Tue Sep 01, 2020 11:07 am

What does this mean?
Heh, I'm not sure either... Google search shows it's a cruise line (or name of a ship?)
Sorry, spelling error. Canard.
why is it a canard?
Because the propellor is in the rear.
Image
LOL, nice.
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adave
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Re: Bear Cub Smells Bubble

Post by adave »

Tesla is far, far ahead of any other car manufacturer when it comes to technology and in particular self-driving technology. It is truly something special to behold when you drive a Tesla and try out the various autonomous driving tech for the first time. They make a remarkable and potentially revolutionary product ala iPhone - having said that, the stock has priced beyond the car business now and so to me the stock it too high to buy right now. They have to disrupt several big industries to justify the valuation. If the stock ever crashes back down to more reasonable levels I would pick some up tho cause they have a fantastic product and brand.
Robot Monster
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Re: Bear Cub Smells Bubble

Post by Robot Monster »

adave wrote: Tue Sep 01, 2020 10:33 pm Tesla is far, far ahead of any other car manufacturer when it comes to technology and in particular self-driving technology. It is truly something special to behold when you drive a Tesla and try out the various autonomous driving tech for the first time. They make a remarkable and potentially revolutionary product ala iPhone - having said that, the stock has priced beyond the car business now and so to me the stock it too high to buy right now. They have to disrupt several big industries to justify the valuation. If the stock ever crashes back down to more reasonable levels I would pick some up tho cause they have a fantastic product and brand.
Is it wrong that it's priced beyond the business of selling cars?

Dogagility: "Not if the real value play is owning the (eventual) worldwide infrastructure for electric vehicle charging and distribution."
TimeLord: "Plus an autonomous driving fleet, plus leading supplier of battery technology for autos and homes."

Elon Musk don't need no stinking car industry!
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Re: Bear Cub Smells Bubble

Post by pkcrafter »

nisiprius wrote: Wed Aug 26, 2020 6:26 am The question isn't "do I smell a bubble." (I do, and to me Robinhood is the current equivalent of 1990s "day-traders" in T1-line brokerage parlors).

The question is "what should I do if I smell a bubble?"

Of course you can get the long-term average return of the stock market simply by buying and holding a total market index fund.

Here is what many people believe. "You would be a fool to blindly keep buying and holding during a bubble. You can reliably improve your returns, by a large amount, if you can spot a bubble. You will get a large improvement even if you are not perfectly correct, you can at least avoid the worst of it. You can avoid buying overpriced stocks during a bubble. You can realize some gains during a bubble--'nobody ever went broke taking a profit.' If you are really sure it is a bad bubble, you can go to cash, lock in your gains, and wait out the collapse."

I no longer believe this. There are three catches.

1) The old devil efficient market hypothesis applies during a bubble, too. If everyone believed it was a bubble, there would not be a bubble.

2) The stock market is fractal. There are sharp upward movements within every downward movement and sharp downward movements within every upward movement. All the upward movements induce euphoria, you just forget it if they are followed by downward movements. Just because you sense a degree of irrational mania in the market just means things are normal. Sometimes a crash follows, sometimes it doesn't.

There were unmistakable feelings of euphoria in 1996, so much so that Alan Greenspan was led to warn about "irrational exuberance" on December, 5th, 1996. The Dow Jones Industrial Average (DJIA) closed at 6,437 on that day. It reached 11,337 on May 21, 2001, but by October 9th, 2002 it was down to 7,286.

Was Greenspan "right?"

3) We overestimate the ease of being "right" in a vague way ("Sooner or later a crash is coming and it may be terrific," "We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?") Particularly in hindsight, we selectively remember our uneasy feelings that preceded crashes and forget uneasy feelings that didn't.

We underestimate the precision in timing needed to realize improvements from timing maneuvers. One of the most interesting bits of research in this regard is Jeremy Siegel's work, which he described in a chapter on "Stocks and the Business Cycle" in Stocks for the Long Run. He found that an investor with access to a crystal ball giving the starting and end dates of every recession, who went to cash on the day a recession began and back to stocks on the day it ended, realized only a very modest improvement in return. In order to get a large benefit, it was necessary to make the sale and repurchase almost precisely six months before those dates.

In other words, smelling a bubble isn't enough. You have to see the bubble, measure the thin-film interference pattern in the places where it is thinning (the dark center of the rainbow rings), and take action fairly precisely just before the peak.

1) I honestly think that "sooner or later a crash is coming and it may be terrific" (the only reason we remember Roger Babson's words is because he said them in September, 1929). 2) And I am doing nothing about it.
Bang, Zoom.... and a PLUS 1


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Re: Bear Cub Smells Bubble

Post by anoop »

nisiprius wrote: Wed Aug 26, 2020 6:26 am There were unmistakable feelings of euphoria in 1996, so much so that Alan Greenspan was led to warn about "irrational exuberance" on December, 5th, 1996. The Dow Jones Industrial Average (DJIA) closed at 6,437 on that day. It reached 11,337 on May 21, 2001, but by October 9th, 2002 it was down to 7,286.

Was Greenspan "right?"
Did he just make a statement or did he actually implement policy to cool the market? If only the former, then it doesn't really count. It's what the fed does in terms of policy that matters.
nisiprius wrote: Wed Aug 26, 2020 6:26 am 1) I honestly think that "sooner or later a crash is coming and it may be terrific" (the only reason we remember Roger Babson's words is because he said them in September, 1929).
Do you think we can get a crash with the fed being in a mode where they will do "whatever it takes"? Is there a historical precedence where we had a market crash with the fed being fully accommodative and the fed assuring it will do everything it can to support asset prices?
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Re: Bear Cub Smells Bubble

Post by nzahir »

nisiprius wrote: Wed Aug 26, 2020 6:26 am The question isn't "do I smell a bubble." (I do, and to me Robinhood is the current equivalent of 1990s "day-traders" in T1-line brokerage parlors).

The question is "what should I do if I smell a bubble?"

Of course you can get the long-term average return of the stock market simply by buying and holding a total market index fund.

Here is what many people believe. "You would be a fool to blindly keep buying and holding during a bubble. You can reliably improve your returns, by a large amount, if you can spot a bubble. You will get a large improvement even if you are not perfectly correct, you can at least avoid the worst of it. You can avoid buying overpriced stocks during a bubble. You can realize some gains during a bubble--'nobody ever went broke taking a profit.' If you are really sure it is a bad bubble, you can go to cash, lock in your gains, and wait out the collapse."

I no longer believe this. There are three catches.

1) The old devil efficient market hypothesis applies during a bubble, too. If everyone believed it was a bubble, there would not be a bubble.

2) The stock market is fractal. There are sharp upward movements within every downward movement and sharp downward movements within every upward movement. All the upward movements induce euphoria, you just forget it if they are followed by downward movements. Just because you sense a degree of irrational mania in the market just means things are normal. Sometimes a crash follows, sometimes it doesn't.

There were unmistakable feelings of euphoria in 1996, so much so that Alan Greenspan was led to warn about "irrational exuberance" on December, 5th, 1996. The Dow Jones Industrial Average (DJIA) closed at 6,437 on that day. It reached 11,337 on May 21, 2001, but by October 9th, 2002 it was down to 7,286.

Was Greenspan "right?"

3) We overestimate the ease of being "right" in a vague way ("Sooner or later a crash is coming and it may be terrific," "We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?") Particularly in hindsight, we selectively remember our uneasy feelings that preceded crashes and forget uneasy feelings that didn't.

We underestimate the precision in timing needed to realize improvements from timing maneuvers. One of the most interesting bits of research in this regard is Jeremy Siegel's work, which he described in a chapter on "Stocks and the Business Cycle" in Stocks for the Long Run. He found that an investor with access to a crystal ball giving the starting and end dates of every recession, who went to cash on the day a recession began and back to stocks on the day it ended, realized only a very modest improvement in return. In order to get a large benefit, it was necessary to make the sale and repurchase almost precisely six months before those dates.

In other words, smelling a bubble isn't enough. You have to see the bubble, measure the thin-film interference pattern in the places where it is thinning (the dark center of the rainbow rings), and take action fairly precisely just before the peak.

1) I honestly think that "sooner or later a crash is coming and it may be terrific" (the only reason we remember Roger Babson's words is because he said them in September, 1929). 2) And I am doing nothing about it.
Well the prices were back to the same price around March of 09, so he was pretty right

So 13 years later, basically flat, and now account for REAL inflation (not the bullshit 2-3.5% they say, especially in large cities)

If you were in real estate you could have earned appreciation, had leverage with loans against property, tax benfits, and rental income

We have had multiple times in US and world history when a decade plus of gains are wiped out in under a year, naive to think it won't happen again
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Re: Bear Cub Smells Bubble

Post by adave »

One change from prior crashes is it seems the Fed is very quick to pounce now in the face of a crisis. It seems we have gone from:

Great Depression: Fed fails to pounce at all and in fact makes it worse and longer by reducing liquidity.

Corona crisis: Fed pounces massively and very quickly with unprecedented action. They took massive steps incredibly quickly flooding the system with liquidity.

At this point, there is no reason to think the Fed will ever go in reverse and not try to prevent major economic catastrophe if they can.... normal corrections and bear markets will occur but I expect buy and hold investors won’t sell and hold through them like Vanguard investors did during this March.

Personally, my best bet if to invest in stocks fairly aggressively and go along for the ride.....
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Re: Bear Cub Smells Bubble

Post by visualguy »

adave wrote: Wed Sep 02, 2020 12:56 pm Corona crisis: Fed pounces massively and very quickly with unprecedented action. They took massive steps incredibly quickly flooding the system with liquidity.
My understanding is that this works in the short run, but it's just a bridge to economic recovery. If the economy doesn't recover at the end of this bridge, then we still fall down the cliff because this bridge can't be extended indefinitely - the Fed can't prop up the asset prices enough in the long run. We still need to get over this COVID recession within a reasonable amount of time. Hopefully, there will be a good vaccine soon.
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Re: Bear Cub Smells Bubble

Post by cashboy »

what do bubbles smell like?
chicken?
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Re: Bear Cub Smells Bubble

Post by knpstr »

visualguy wrote: Wed Sep 02, 2020 2:25 pm
adave wrote: Wed Sep 02, 2020 12:56 pm Corona crisis: Fed pounces massively and very quickly with unprecedented action. They took massive steps incredibly quickly flooding the system with liquidity.
My understanding is that this works in the short run, but it's just a bridge to economic recovery. If the economy doesn't recover at the end of this bridge, then we still fall down the cliff because this bridge can't be extended indefinitely - the Fed can't prop up the asset prices enough in the long run. We still need to get over this COVID recession within a reasonable amount of time. Hopefully, there will be a good vaccine soon.
It's important to remember the only thing that was ever holding the economy back (this time) was the government ban on working. We came from a red hot economy, to a ban on work, now as work resumes we are going back to a red hot economy (if business are allowed to remain open) with the added kick of a massive stimulus. If businesses are open we should be at record highs across the board. If you've noticed, people are buying new vehicles and house like they are a pair of shoes. Factories here running 7 days a week 10 hours M-F and 8 hours Sa-Su for workers (auto related).
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Re: Bear Cub Smells Bubble

Post by anoop »

knpstr wrote: Wed Sep 02, 2020 3:22 pm
visualguy wrote: Wed Sep 02, 2020 2:25 pm
adave wrote: Wed Sep 02, 2020 12:56 pm Corona crisis: Fed pounces massively and very quickly with unprecedented action. They took massive steps incredibly quickly flooding the system with liquidity.
My understanding is that this works in the short run, but it's just a bridge to economic recovery. If the economy doesn't recover at the end of this bridge, then we still fall down the cliff because this bridge can't be extended indefinitely - the Fed can't prop up the asset prices enough in the long run. We still need to get over this COVID recession within a reasonable amount of time. Hopefully, there will be a good vaccine soon.
It's important to remember the only thing that was ever holding the economy back (this time) was the government ban on working. We came from a red hot economy, to a ban on work, now as work resumes we are going back to a red hot economy (if business are allowed to remain open) with the added kick of a massive stimulus. If businesses are open we should be at record highs across the board. If you've noticed, people are buying new vehicles and house like they are a pair of shoes. Factories here running 7 days a week 10 hours M-F and 8 hours Sa-Su for workers (auto related).
stock market != economy
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Re: Bear Cub Smells Bubble

Post by 000 »

cashboy wrote: Wed Sep 02, 2020 3:10 pm what do bubbles smell like?
chicken?
Like a stampede of bulls running towards a cliff on a hot summer day.
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Re: Bear Cub Smells Bubble

Post by cashboy »

000 wrote: Wed Sep 02, 2020 3:26 pm
cashboy wrote: Wed Sep 02, 2020 3:10 pm what do bubbles smell like?
chicken?
Like a stampede of bulls running towards a cliff on a hot summer day.
hmmm...

not very appealing then :wink:
Last edited by cashboy on Wed Sep 02, 2020 7:10 pm, edited 1 time in total.
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Re: Bear Cub Smells Bubble

Post by BW1985 »

000 wrote: Wed Sep 02, 2020 3:26 pm
cashboy wrote: Wed Sep 02, 2020 3:10 pm what do bubbles smell like?
chicken?
Like a stampede of bulls running towards a cliff on a hot summer day.
Are you out of equities then? Just wondering how convinced you are of the upcoming bubble burst.
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Re: Bear Cub Smells Bubble

Post by fredflinstone »

000 wrote: Wed Aug 26, 2020 12:00 am 1. Tech stocks are priced to perfection. TSLA, AAPL come to mind.
2. 100% stock portfolios are all the rage. Bonds are bad. Cash is trash. Gold is gross.
3. The mainstream is pushing TINA (There Is No Alternative to stocks) as well.
4. Almost everyone is either euphoric about stocks or has succumbed to TINA.
5. Berkshire Hathaway has succumbed to holding huge portions of AAPL.
6. People who would never have owned (as much in) stocks in the past are piling in.
7. Some are day trading their stimulus checks or student loans.
8. Some are leaving good jobs in their 30s to live off stocks passively for 50+ years.
9. I have seen discussions about the stock market in non-investment contexts.

Are stocks in a bubble? Or have they reached a permanently high plateau? Or do I need a dose of optimism? :mrgreen:
Just thought I'd point out that stocks are up about 4% since Bear Cub posted this. Market timing is difficult.
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Re: Bear Cub Smells Bubble

Post by 000 »

BW1985 wrote: Wed Sep 02, 2020 3:58 pm
000 wrote: Wed Sep 02, 2020 3:26 pm
cashboy wrote: Wed Sep 02, 2020 3:10 pm what do bubbles smell like?
chicken?
Like a stampede of bulls running towards a cliff on a hot summer day.
Are you out of equities then? Just wondering how convinced you are of the upcoming bubble burst.
I have been staying the course with an asset allocation designed to weather such bubbles.

I am willing to market time at extremes, but haven't felt enough confidence to do so yet. I also do not view fixed income as a haven.

I think there is good chance of a serious bear market worse than 2008 GFC within the next 6 years or so.
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Re: Bear Cub Smells Bubble

Post by BW1985 »

000 wrote: Wed Sep 02, 2020 4:04 pm
BW1985 wrote: Wed Sep 02, 2020 3:58 pm
000 wrote: Wed Sep 02, 2020 3:26 pm
cashboy wrote: Wed Sep 02, 2020 3:10 pm what do bubbles smell like?
chicken?
Like a stampede of bulls running towards a cliff on a hot summer day.
Are you out of equities then? Just wondering how convinced you are of the upcoming bubble burst.
I have been staying the course with an asset allocation designed to weather such bubbles.
What's that look like, are you willing to share?
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Re: Bear Cub Smells Bubble

Post by 000 »

BW1985 wrote: Wed Sep 02, 2020 4:08 pm
000 wrote: Wed Sep 02, 2020 4:04 pm I have been staying the course with an asset allocation designed to weather such bubbles.
What's that look like, are you willing to share?
As an accumulator, I have large holdings in stocks and REITs (>70%). I have decided on a modest US REIT tilt, with a focus on REITs with large acreages per market cap (i.e. natural resources land). Part of the reason for owning REITs is I own no property outright. Within non-REIT stocks, my target is 50% US, 50% ex-US Developed Markets. Everything else is in cash and gold ETF.
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Re: Bear Cub Smells Bubble

Post by adave »

With respect, what is the catalyst for a crash here? Technology is here to stay and keeps inflation in check. Everyday we get closer to the end of the pandemic and a vaccine. After all, the virus will be gone eventually. Sure, many industries have been hurt but the government has stepped in (rightly so imo) to help and rates are zero. I know I have promised my kids a trip to Disney world to celebrate the end of the pandemic!
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Re: Bear Cub Smells Bubble

Post by 000 »

adave wrote: Wed Sep 02, 2020 5:21 pm With respect, what is the catalyst for a crash here? Technology is here to stay and keeps inflation in check. Everyday we get closer to the end of the pandemic and a vaccine. After all, the virus will be gone eventually. Sure, many industries have been hurt but the government has stepped in (rightly so imo) to help and rates are zero. I know I have promised my kids a trip to Disney world to celebrate the end of the pandemic!
I can think of a few possibilities:
  1. Failure of tech and other highly bid stocks to meet the market's hopes and dreams.
  2. A successful economic recovery leading to an exit from public stocks into private riskier assets.
  3. An exit from stocks by speculators once normalcy resumes.
  4. The CV situation worsening beyond the market's optimism (note that CV was not mentioned in my OP as a bubble concern).
  5. A rising interest rate environment.
  6. Fear, right or wrong, of US or World instability.
Note that stocks are not equivalent to overall economic or societal health. Things can go great for society but bad for stocks if stocks are overbid, i.e. stocks don't do "great enough".
Last edited by 000 on Wed Sep 02, 2020 5:46 pm, edited 3 times in total.
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Re: Bear Cub Smells Bubble

Post by nzahir »

Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
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Re: Bear Cub Smells Bubble

Post by 000 »

nzahir wrote: Wed Sep 02, 2020 5:44 pm Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
It gives me pause.
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Re: Bear Cub Smells Bubble

Post by 7eight9 »

nzahir wrote: Wed Sep 02, 2020 5:44 pm Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
Gambling 25% of one's worth (in the case of 100/0 investors) on five individual stocks is typically discouraged on this board. Gambling 25% of one's money on individual stocks period is discouraged. Yet when those 5 stocks are part of the SP500 it is accepted. This seems somewhat funny.
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Re: Bear Cub Smells Bubble

Post by muffins14 »

In a larger sense I think you can be still somewhat diversified here. Say your 100/0 is 57% US and 43% international, about market cap split.

Then you're about 14% in those top 5 stocks, which is still a bit heavy but many posters on the board are OK with people having ~10% of their equity being in their own company's stock. I'd rather be in FANG+ than my own company stock for that 10-14% in any case.
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Re: Bear Cub Smells Bubble

Post by adave »

Those 5 companies are money machines
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Re: Bear Cub Smells Bubble

Post by CyclingDuo »

[quoted post removed by admin LadyGeek]

Triple 000 will hit 2000 posts in only 8 days. A new Boglehead record for 2000 posts in 50 days or less...

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Re: Bear Cub Smells Bubble

Post by LadyGeek »

I removed an off-topic post and a reply. As a reminder, see: General Etiquette
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Re: Bear Cub Smells Bubble

Post by nzahir »

7eight9 wrote: Wed Sep 02, 2020 5:50 pm
nzahir wrote: Wed Sep 02, 2020 5:44 pm Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
Gambling 25% of one's worth (in the case of 100/0 investors) on five individual stocks is typically discouraged on this board. Gambling 25% of one's money on individual stocks period is discouraged. Yet when those 5 stocks are part of the SP500 it is accepted. This seems somewhat funny.
That is what I thought

That is my small concern with VTSAX. There is no rebalancing really besides auto rebalance I guess with values going up and down, right?

But it also takes a lot of effort to rebalance and slice and dice and the difference of results may not be worth it

I may just overweight my 401k in small/mid cap for that reason. Realistically, most things will fall or go up at once (in terms of small, mid, and large). But at least this way I get some way to rebalance w/o having to actually do anything
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Re: Bear Cub Smells Bubble

Post by knpstr »

nzahir wrote: Wed Sep 02, 2020 5:44 pm Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
No. If I was a market timer I'd almost have surely sold very early this year when the pandemic was coming in full force, would still be sitting on the sidelines (pandemic is still "here" right, why buy now?). Vanguard says I'm up ~20% from this time last year. Buy and hold by DCA'ing every week, requires zero effort and as the peaks and valleys come I buy more shares low than I buy high. Simple and effective.

Many many decades of investing to go in my life (God willing), so a correction/crash in the next few years is of no concern.
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Re: Bear Cub Smells Bubble

Post by knpstr »

7eight9 wrote: Wed Sep 02, 2020 5:50 pm
nzahir wrote: Wed Sep 02, 2020 5:44 pm Top 5 companies in the S&P500 now make up 25%, not concerning to anyone?

Has happened during huge bubbles near the peak
Gambling 25% of one's worth (in the case of 100/0 investors) on five individual stocks is typically discouraged on this board. Gambling 25% of one's money on individual stocks period is discouraged. Yet when those 5 stocks are part of the SP500 it is accepted. This seems somewhat funny.
Your first sentence makes an assumption that is false for many if not most.

100% of my net worth is not in my 100/0 portfolio.

Other than that, the nature of index fund investing is the investor doesn't make any individual stock decisions, they just cast their lot in with the market at large and accept the results trying to do this at the lowest cost possible.
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Re: Bear Cub Smells Bubble

Post by Robot Monster »

adave wrote: Wed Sep 02, 2020 12:56 pm One change from prior crashes is it seems the Fed is very quick to pounce now in the face of a crisis. It seems we have gone from:

Great Depression: Fed fails to pounce at all and in fact makes it worse and longer by reducing liquidity.

Corona crisis: Fed pounces massively and very quickly with unprecedented action. They took massive steps incredibly quickly flooding the system with liquidity.

At this point, there is no reason to think the Fed will ever go in reverse and not try to prevent major economic catastrophe if they can.... normal corrections and bear markets will occur but I expect buy and hold investors won’t sell and hold through them like Vanguard investors did during this March.

Personally, my best bet if to invest in stocks fairly aggressively and go along for the ride.....
I was thinking about this post. Doesn't the ability of the Fed to go full throttle again rest on over-inflation being far from a concern? (Too little inflation seems to be more the worry, that "the U.S. could conceivably end up in a Japan-like 'liquidity trap' in which the Fed became powerless to achieve its monetary policy objectives.")

Quote grabbed from Bloomberg article by Bill Dudley, "The Fed’s New Approach Won’t Help the Economy Now."
https://www.bloomberg.com/amp/opinion/a ... ssion=true
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Re: Bear Cub Smells Bubble

Post by anoop »

anoop wrote: Mon Aug 31, 2020 12:14 pm I sold FB today, in at 260 just a couple of weeks ago, out at 295 today. Still holding AAPL and ZM.
Sold AAPL and ZM today. Didn't quite make the peak, but still made 10% on AAPL and 20% on ZM for a few days of holding them. So back to 100% cash.
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Re: Bear Cub Smells Bubble

Post by 000 »

anoop wrote: Thu Sep 03, 2020 10:43 am
anoop wrote: Mon Aug 31, 2020 12:14 pm I sold FB today, in at 260 just a couple of weeks ago, out at 295 today. Still holding AAPL and ZM.
Sold AAPL and ZM today. Didn't quite make the peak, but still made 10% on AAPL and 20% on ZM for a few days of holding them. So back to 100% cash.
What's your long term strategy here? Sell stocks after X% gains?
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Re: Bear Cub Smells Bubble

Post by latesaver »

000 wrote: Thu Sep 03, 2020 11:58 am
anoop wrote: Thu Sep 03, 2020 10:43 am
anoop wrote: Mon Aug 31, 2020 12:14 pm I sold FB today, in at 260 just a couple of weeks ago, out at 295 today. Still holding AAPL and ZM.
Sold AAPL and ZM today. Didn't quite make the peak, but still made 10% on AAPL and 20% on ZM for a few days of holding them. So back to 100% cash.
What's your long term strategy here? Sell stocks after X% gains?
That is a value-destroying long term strategy, in general.
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