The Misconceptions About Bubbles

By Jack Forehand (@practicalquant) —  Bubble has become one of the most overused words in finance. If you read the financial media, you would likely conclude that we are currently surrounded by bubbles. Not only are stocks currently in bubble territory, but bonds are also a classic bubble. And don’t even get them started about cryptocurrencies. Even with their decline, they are still commonly referred to as the greatest bubble of all time. Either all of… Read More

How Investors Can Survive a Market Bubble

While stocks are not in bubble territory, according to a recent article in The Wall Street Journal, “there are increasing signs of euphoria, and it is plausible that a true blowout end to the bull market could be on the way soon.” The article discusses current conditions and trends, and offers four options that investors can consider in attempting to time an exit from a “frothy” market: Get out early—”As the bubble builds, sell into… Read More

Jeremy Grantham Says Market Has More Upside

In a recent essay, GMO co-founder and chief investment strategist Jeremy Grantham offered insights on the market by “looking very hard at all the great bubbles of the past,” and “searching for useful guides to the future.” His commentary was excerpted in Barron’s. While Grantham agrees that today’s market is priced “exceptionally high,” he says the typical examples of past bubbles are “not just characterized by higher-than-average prices.” Indicators of “extremes of euphoria” he says,… Read More

Where’s the Market Bubble?

Memories of the “frothy” markets of 2000 and 2007 is tempering investors’ enthusiasm, according to The Wall Street Journal. “After an eight-year bull market and the cheapest borrowing costs in history,” the article says, “the big surprise isn’t that the stock market’s high, but that it isn’t higher still.” While suggesting that “mini-bubbles have been appearing,” the article says this isn’t leading to investors to “getting carried away and mispricing risks across the market.” It… Read More

Goldman Chief Concerns Regarding Demand for U.S. Stocks

As investors turn to stocks and away from bonds in search of income, Goldman Sachs chief executive Lloyd Blankfein suggests the possible “risk of the protracted era of low interest rates fueling bubbles,” according to a recent Bloomberg article. The article explains that the difference between European stock dividends and yields on low-grade debt, “which inverted in 2013, recently widened in favor of stock dividends” to the highest degree since at least 2005—evidence of increased demand… Read More

The Genesis of Market Bubbles

The concept of market bubbles and how they come about is addressed in a recent report authored by Morgan Housel of Collaborative Fund. In the report, Housel supports the following arguments: Bubbles are an “unavoidable feature in markets where investors with different goals compete on the same field.” Bubbles are more closely related to “shrinking time horizon” than to rising valuations. Investors can best protect themselves by “understanding and acting upon your own time horizon,… Read More

Grantham: Current Market is an “Anti-Bubble”

The U.S. market is unlikely to “go bang” the way some have in the past, says Jeremy Grantham, chief investment strategist and co-founder of asset management firm GMO. In a recent Barron’s article, Grantham argues that we are not facing a “classic bubble, not even close.” In Grantham’s opinion, it is more likely that a correction, or mean reversion, will be “slow and incomplete,” leading to “dismal consequences for investors: we are likely to limp… Read More

Buffett on Bubbles: A “This Can’t Go Wrong” Mentality Gets Investors in Trouble

A piece appearing on Yahoo Finance quotes at length from Warren Buffett’s response to the Financial Crisis Inquiry Commission about what caused the housing bubble and related 2008-09 financial crisis. Buffett began by quoting his mentor, Benjamin Graham: “Ben Graham made an observation 50 or so years ago to me. . . . He said, ‘You can get in a whole lot more trouble in investing with a sound premise than with a false premise.’”… Read More