{"id":235430,"date":"2025-12-02T13:07:39","date_gmt":"2025-12-02T18:07:39","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=235430"},"modified":"2025-12-03T02:31:00","modified_gmt":"2025-12-03T07:31:00","slug":"a-little-bubble-talk-among-friends","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/a-little-bubble-talk-among-friends\/","title":{"rendered":"A Little Bubble Talk Among Friends"},"content":{"rendered":"\n

As the glow of another Thanksgiving recedes, one of the things I\u2019m thankful for is a close-knit group of longtime friends.  We\u2019ve kept in touch ever since college, and one of the ways we do so is via a wide-ranging, usually irreverent group text.  Last night, one of them posted an article from The Economist <\/em>entitled \u201cHow To Spot a Bubble Bursting<\/a>\u201d and asked for my opinion.  Here\u2019s my response.<\/p>\n\n\n\n

Before I chime in, I\u2019ll do my best to quickly summarize the article\u2019s salient points for those who can\u2019t access the link<\/a>. <\/p>\n\n\n\n

    \n
  1. While valuations become elevated in a bubble, measures like P\/E and Price\/Sales are highly unreliable timing indicators.\u00a0 They point out premature bubble warnings from the late \u201890s from famed investors like Ray Dalio, George Soros, Peter Lynch, Warren Buffett and others.\u00a0 Those proved to be right \u2013 eventually \u2013 but only after costing them millions for fighting the tape<\/a>.<\/li>\n\n\n\n
  2. There is a solid inverse correlation between investment returns and cyclically adjusted price\/earnings ratios (aka \u201cCAPE\u201d or the \u201cShiller P\/E\u201d), but this is over a 10-year period.\u00a0 On a 1-year basis, there is almost none.<\/li>\n\n\n\n
  3. There appears to be a relationship between spikes Google searches for an investment theme and subsequent falls.\u00a0 When searches for terms like \u201cARKK\u201d, \u201cBitcoin\u201d, \u201cGME\u201d, and \u201cSPAC\u201d spiked, those often coincided with peaks in those investments.<\/li>\n<\/ol>\n\n\n\n

    Given that backdrop, I offered one of my longer texts.  Here is what I said last night:<\/p>\n\n\n\n

    There\u2019s a lot to unpack<\/em> but I agree with the general premise.<\/em><\/p>\n\n\n\n

    Bubbles are obvious with 20\/20 hindsight and usually give plenty of signals while they\u2019re occurring.  But it\u2019s important to remember that markets can remain irrational longer than you can remain solvent. <\/em><\/p>\n\n\n\n

    Things are clearly quite frothy, though little by little the froth is coming out of some sectors (quantum computing, crypto and related investment vehicles [<\/em>Digital Asset Treasuries], highly speculative pump and dumps).  Eventually we run out of frothy sectors and there\u2019s nothing left but the big winners and then they come for them too.<\/em><\/p>\n\n\n\n

    Is that now, weeks, months, years?  Hard to say.  But since markets have a nasty way of making the maximum number of people miserable at the worst possible time, we\u2019re nearly at a point where I don\u2019t think there are many new people or much more money left to suck in.<\/em><\/p>\n\n\n\n

    As I re-typed that last sentence, I\u2019ve come to think it\u2019s a bit harsh.  For starters, I read a news report this morning that money market balances crossed $8 trillion<\/a> for the first time.  While I believe that the concept of \u201ccash on the sidelines\u201d is yet another imperfect measure, there is indeed a surfeit of investable liquid assets.<\/p>\n\n\n\n

    More importantly, there is nothing wrong with democratizing investment \u2013 heck, I\u2019ve spent decades working towards that goal \u2013 but I do get concerned when I hear that speculating is distracting people from their primary source of income \u2013 their jobs.  Yesterday, the Wall Street Journal<\/em> wrote an article subtitled \u201cStock Bets and Crypto Culture Take Over the Military<\/a>.\u201d   Let me be very clear \u2013 I have no issue if our hard-working service members are also successful investors.  I applaud the Sergeant who has built a six-figure nest egg mainly from index funds.  But I am concerned that the experience of the truck driver with a $38,000 salary who has made and lost five figures multiple times in recent years is becoming increasingly typical.  Anyone is capable of investment success, but when trading and speculation become excessive that can become a worrisome sign.  The problem of course is defining \u201cexcessive.\u201d  The apocryphal story<\/a> of Bernard Baruch and\/or Joe Kennedy avoiding the Crash of 1929 after getting stock tips from their shoeshine guy has always stuck in my head<\/a>. <\/p>\n\n\n\n

    This morning a friend followed up.  He has been phenomenally successful in his chosen career and has the multiple houses and museum-worthy collectibles to demonstrate it.  He wrote:<\/p>\n\n\n\n

    I\u2019m at the point in my life where I have achieved everything I want\u2026 and I just don\u2019t want it taken away from me.  I\u2019ve become an incredibly cautious investor\u2026 I see no reason to take any risks in any market.  Am I wrong? \u2026  I can do a lot of good as long as I don\u2019t lose money<\/em><\/p>\n\n\n\n

    My response:<\/p>\n\n\n\n

    Absolutely not!… that\u2019s a worthy goal.  Capital preservation along with some income generation is how to achieve it.<\/em><\/p>\n\n\n\n

    Knowing this friend\u2019s success and charitable goals, various other friends (all well versed in finance, real estate, and the like) offered similar sentiments.  One recommended all fixed income, a mix of corporates and Treasuries.  Another suggested that equity needs to be part of the mix as an inflation hedge.  I echoed that low-beta, high-dividend stocks are appropriate for conservative investors nearing retirement, as my friend is (with the caveat that the companies\u2019 cash flows comfortably finance the dividend payouts). <\/p>\n\n\n\n

    Bottom line, we may or may not be in a bubble, and while I agree there are elements of the latter that may be present, timing its demise is essentially impossible. Thus, it all comes back to your risk tolerance and life situation.  If you\u2019ve achieved your retirement goals, then consider what you are willing to risk and what you need to preserve.  If you\u2019re older and don\u2019t feel that you\u2019ve reached that point, consider carefully how much risk you are willing to take to achieve your goals and what the damage might be if you assume too much risk.  And if you\u2019re a younger investor with the potential for a long career ahead, you have more leash to take risk and to recover from bad experiences, but be sure you don\u2019t lose sight of the career that could provide you with long-term success.<\/p>\n\n\n\n

    <\/p>\n","protected":false},"excerpt":{"rendered":"

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