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Yes. It's a Bubble. So What?

2,845 Views | 7 Replies | Last: 5 yr ago by The Wonderer
Woody2006
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AG
Great article:
https://www.researchaffiliates.com/en_us/publications/articles/668-yes-its-a-bubble-so-what.html?evar36=eml_Bubble_0418_Section_1_Bubble_CTA&_cldee=anRhbW55QHJlYWxjbGVhcm1hcmtldHMuY29t&recipientid=contact-e6289710c8cbe2119aa7005056bc3cff-5f875b2cd34d
Quote:

  • The word "bubble" is tossed around with abandon. We offer a rigorous definition for the word, and then test the definition against current markets.
  • Several bubbles are evident today, most importantly a tech bubble, eerily similar toalbeit narrower thanthe "new economy" dogma of the 20002001 dot-com bubble. We also see a bubble brewing in cryptocurrencies and micro-bubbles in select stocks such as Tesla.
  • Investors can take action to protect their portfolios and potentially benefit from the bubble by reducing exposure to bubble assets; seeking out exposure to anti-bubbles, where assets or markets are irrationally cheap; investing in value-based smart beta strategies especially in European and emerging markets; and avoiding capitalization-weighted index funds, which inherently overweight the bubble assets.
  • Finally, we must be patient. Bubbles typically continue longer than expected, until they suddenly pop.

Quote:

By their very nature, the underlying conditions of a bubble are expected to continue or the bubble would collapse immediately. Investors, however, can go their own way by not participating in the bubble. We recommend four actions an investor can take to protect themselves and even benefit when the bubble eventually bursts:
  • First, an investor can materially reduce or eliminate their exposure to bubble assets. If we cannot construct a reasonable scenario in which the bubble assets could offer an acceptable risk premium, the "greater fool" rationalesomeone will pay more for it laterresembles picking up nickels in front of a steamroller; at a minimum, we can underweight these assets.
  • Second, an investor can seek anti-bubbles in the market and invest in them. Anti-bubbles are sectors or markets priced at levels that cannot plausibly deliver anything but a large risk premium. An anti-bubble cannot exist in a single asset because almost any asset's price can drop to zero. But consider junk bonds, financials, and consumer durables in early 2009. Each failure of a single company meant that the survivors in that sector had less competition, higher margins, and a clear runway. Collectively, the sector itself couldn't fail to deliver a very large risk premium, barring a handful of Armageddon scenarios.11 EM value stocks in early 2016 were a similar example. RAFI in emerging markets fell to a Shiller PE of 5.6x, an earnings yield of 18%. In a world of zero-yield bonds and cash, EM value was an obvious anti-bubble. Similar to the trajectory of a bubble, an anti-bubble continues to collapse, until it turns. Therefore, averaging into our positions, with an eye toward not exceeding the investor's tolerance for maverick risk, is a prudent way to invest. As with bubbles, the quest for the market-turning catalyst is intellectually challenging and fun, but not terribly useful. An anti-bubble can be a rich source of profit for the patient investor.
  • Third, an investor can diversify into investments that are not in bubble territory. For example, as of early 2018, EM equities and many developed-country stock markets are trading at discounts to their historic valuations rather than the extravagant premium of the S&P 500. As Arnott, Kalesnik, and Masturzo (2018) noted, many arguments have been advanced to justify a US CAPE ratio of 33x. Each of these arguments applies equally to the European and emerging markets, which sport CAPE ratios less than half as expensive as those in the US market.12 For example, if low yields in the United States justify high CAPE ratios in the United States, then why do zero yields in Europe lead to a CAPE ratio of 16x? Other markets offer better places to take on market risk. Seek them out.
  • Fourth, an investor can remember lessons learned from past bubbles, such as the collateral damage done to the technology-led capitalization-weighted indices. The S&P 500 was savaged in the aftermath of the dot-com bubble, down 23.4% over the 24 months from March 2000 to March 2002, on its way to an eventual 49% decline just six months later. While tech stocks were in free fall, the average US stock rose 7.0% over the same two-year period, then suffered a short,13 sharp 36% bear market. For most stocks, the bull market of the 1990s ended not in 2000 when the tech bubble burst, but in March 2002.

Today, in the US market, value stocks are trading at quite attractive levels, especially in comparison to growth stocks. This is even truer in international markets, and the growthvalue spread in emerging markets is very near an all-time extreme. If investors significantly reduce equity allocations away from traditional market-cap exposuresespecially in the United Statesand into value-based smart beta strategiesespecially in the "half-priced" European and emerging marketsthey are likely to enjoy significant insulation against the next eventual-but-inevitable market downturn.
FriscoKid
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AG
Why worry about bubbles?

Because they pop and investors lose a significant amount of money when they do.
TwoMarksHand
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AG
FriscoKid said:

Why worry about bubbles?

Because they pop and investors lose a significant amount of money when they do.


Not if you don't sell.
AR_Ag95
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AG
TwoMarksHand said:

FriscoKid said:

Why worry about bubbles?

Because they pop and investors lose a significant amount of money when they do.




Not if you don't sell.


Ding Ding Ding! If you would have not touched your money in your 401K during the last crash, you would have been way ahead of the curve...... the bounce back was crazy fast. Trying to time the market is a losing proposition.
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AR_Ag95
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AG
I guess I'm old and 4 years seems like a blink of the eye...... my 401K is very healthy now, and I'm glad I didn't blink during Brexit!
The Wonderer
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AG
When the market drops, you just buy more to lower you average buy in cost. Marathon and not a sprint for most people. If you're close to retirement, you shouldn't be leveraged in high volatility holdings anyway unless you're diversified enough to withstand the dips.
oldarmy1
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AG
Bottoms happen fast. Tops initially happen fast but historically trend downward in spurts and more slowly.

Current conditions are case in point. When that top occurred and my outlook became sideways markets, at best, I took off over 50% of all long term monies. For clarity these were 401k, SEP holdings while trading account was more active initially, trading the volume swings. Then 6 weeks ago I changed to thin thin thin on trading account.

The markets will not suddenly reach new highs FAST from where we are right now. The worst case for my position is buying back somewhere between a clear break above resistance and where I exited.

Should the markets lose current major support then you WILL see what fast looks like with another spurt downward.

Diversified buy and hold with dollar cost averaging has always been a successful strategy. It should be the go to approach for most people.

That said, I enjoyed an additional average 48% gain in retirement accounts due primarily to 4 macro events in my investing lifetime. Only one of those exits were perfectly timed and two re-entries were perfectly timed. When the gap between a top and bottom is wider than the grand canyon I don't have to be perfect.

Let's see if this current time continues to become number 5 macro event. So far we are 1650 points on the DOW from my exit. If anyone thinks I'm likely to miss a rapid rise I can't reason with you. It simply doesn't work that way from a clearly sideways market.

Is anyone willing to argue that we haven't been in a sideways market? I mean that is a posted reality months back now. And in a sideways market from a rapid rise top generally makes downside risk higher. It also makes sidelining cash prudent.





The Wonderer
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AG
oldarmy1 said:

Bottoms happen fast. Tops initially happen fast but historically trend downward in spurts and more slowly.

Current conditions are case in point. When that top occurred and my outlook became sideways markets, at best, I took off over 50% of all long term monies. For clarity these were 401k, SEP holdings while trading account was more active initially, trading the volume swings. Then 6 weeks ago I changed to thin thin thin on trading account.

The markets will not suddenly reach new highs FAST from where we are right now. The worst case for my position is buying back somewhere between a clear break above resistance and where I exited.

Should the markets lose current major support then you WILL see what fast looks like with another spurt downward.

Diversified buy and hold with dollar cost averaging has always been a successful strategy. It should be the go to approach for most people.

That said, I enjoyed an additional average 48% gain in retirement accounts due primarily to 4 macro events in my investing lifetime. Only one of those exits were perfectly timed and two re-entries were perfectly timed. When the gap between a top and bottom is wider than the grand canyon I don't have to be perfect.

Let's see if this current time continues to become number 5 macro event. So far we are 1650 points on the DOW from my exit. If anyone thinks I'm likely to miss a rapid rise I can't reason with you. It simply doesn't work that way from a clearly sideways market.

Is anyone willing to argue that we haven't been in a sideways market? I mean that is a posted reality months back now. And in a sideways market from a rapid rise top generally makes downside risk higher. It also makes sidelining cash prudent.






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