Investing In A Bubble
Investing In A Bubble
The US stock market in particular at this time looks as though it could be in a major bubble when looking at metrics such as
price to earnings ratio or cyclically adjusted price to earnings ratio.
https://www.multpl.com/shiller-pe
Unfortunately, unless anyone has better knowledge, the generally accepted view is that it is impossible to accurately time a bubble peak.
The question therefore is, what are the best strategies for investing in this time in an effort to get some of the market gains but not get
wiped out when the thing bursts?
price to earnings ratio or cyclically adjusted price to earnings ratio.
https://www.multpl.com/shiller-pe
Unfortunately, unless anyone has better knowledge, the generally accepted view is that it is impossible to accurately time a bubble peak.
The question therefore is, what are the best strategies for investing in this time in an effort to get some of the market gains but not get
wiped out when the thing bursts?
Re: Investing In A Bubble
There are at least two ways any given bubble may pop:
- Upward via inflation
- Downward via deflation (or slow growth)
Think about inflation:
An example of upward inflation is Argentina stock market which went from 6k in 2012ish to 56k this year. In 2012 1 USD would have been about 5 Argentine pesos. In 2021 1 USD would buy you about 94 Argentine pesos. The market "grew" at 28% annually while the dollar devalued at 39%, meaning staying in the market lost you money.
Think about deflation:
An example of the downward spiral is the great depression, just using 1929 to 32, if you held stock and it fell about 90% while the currency deflated by about 25% per the BLS CPI numbers.
Now with that in mind, there are several strategies to handling the problem of market timing:
-Taleb style barbells-Make small bets with extreme outcomes. Look for bets that pay out 5:1 or 10:1. Vary the outcome assumptions based upon your inflation/deflation thesis if you think it has predictive power. e.g. SP500 will be half off in 3 years via put options. Lumber will half in price in the next 24 months. Lumber will triple in price in the next 24 months.
- PP/Golden butterfly- Don't time or guess how things will work out, own a bit of everything. Maybe nudge the portfolio towards growth.
- Find cheaper businesses. E.g. Insurance companies, Emerging Markets, relative value plays (Europe vs US).
- Replace stocks with calls.
- Replace calls with straddles.
- Own put options.
- Go to cash/gold/bitcoin/land or whatever you believe is a safe asset.
- Get a mortgage (NOTE: In hyperinflation you may later on find that you have to pay more of the loan back than you'd expect, see Germany for some history on this)
- Barbell who in the markets will succeed in two likely outcomes e.g. FANGs + EEM commodities.
Of course this all assumes that history will repeat and that some other scenario won't emerge and/or that the bubble popping will only have financial consequences. The other thing it assumes is we won't just experience 20 years of choppy, do nothing returns.
- Upward via inflation
- Downward via deflation (or slow growth)
Think about inflation:
An example of upward inflation is Argentina stock market which went from 6k in 2012ish to 56k this year. In 2012 1 USD would have been about 5 Argentine pesos. In 2021 1 USD would buy you about 94 Argentine pesos. The market "grew" at 28% annually while the dollar devalued at 39%, meaning staying in the market lost you money.
Think about deflation:
An example of the downward spiral is the great depression, just using 1929 to 32, if you held stock and it fell about 90% while the currency deflated by about 25% per the BLS CPI numbers.
Now with that in mind, there are several strategies to handling the problem of market timing:
-Taleb style barbells-Make small bets with extreme outcomes. Look for bets that pay out 5:1 or 10:1. Vary the outcome assumptions based upon your inflation/deflation thesis if you think it has predictive power. e.g. SP500 will be half off in 3 years via put options. Lumber will half in price in the next 24 months. Lumber will triple in price in the next 24 months.
- PP/Golden butterfly- Don't time or guess how things will work out, own a bit of everything. Maybe nudge the portfolio towards growth.
- Find cheaper businesses. E.g. Insurance companies, Emerging Markets, relative value plays (Europe vs US).
- Replace stocks with calls.
- Replace calls with straddles.
- Own put options.
- Go to cash/gold/bitcoin/land or whatever you believe is a safe asset.
- Get a mortgage (NOTE: In hyperinflation you may later on find that you have to pay more of the loan back than you'd expect, see Germany for some history on this)
- Barbell who in the markets will succeed in two likely outcomes e.g. FANGs + EEM commodities.
Of course this all assumes that history will repeat and that some other scenario won't emerge and/or that the bubble popping will only have financial consequences. The other thing it assumes is we won't just experience 20 years of choppy, do nothing returns.
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Re: Investing In A Bubble
There seem to be bubbles everywhere. When everything is a bubble, nothing is a bubble. I tend to see the current investing climate with an inflationary lens due to the fact that everything seems overvalued.
My plan is to diversify, take on a reasonable amount of debt, continue to refinance, and see how things play out over the next 12 months.
My plan is to diversify, take on a reasonable amount of debt, continue to refinance, and see how things play out over the next 12 months.
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- Posts: 265
- Joined: Thu Jan 07, 2021 7:45 pm
Re: Investing In A Bubble
Yes, there do seem to be bubbles wherever you look: equities, commodities, real estate, toilet paper, tulip bulbs (oh wait, that was 1637) ... you name it!
I read an article today about the humble I-Bond. Many of which we have maturing in paper form since late 90s - early 2000s. New rates were just set on Monday.
https://www.treasurydirect.gov/indiv/pr ... glance.htm
At 3.54% with zero risk, I can’t imagine a better way to invest $10k (for an emergency fund).
We’ll be buying some.
Of course, if you wanted to take on a little more risk, you could always look for some likely candidates to short or buy put options. I’ve tried the former, but not the latter.
I read an article today about the humble I-Bond. Many of which we have maturing in paper form since late 90s - early 2000s. New rates were just set on Monday.
https://www.treasurydirect.gov/indiv/pr ... glance.htm
At 3.54% with zero risk, I can’t imagine a better way to invest $10k (for an emergency fund).
We’ll be buying some.
Of course, if you wanted to take on a little more risk, you could always look for some likely candidates to short or buy put options. I’ve tried the former, but not the latter.
Re: Investing In A Bubble
My own preferred solution is to prioritize investment consistency through both good times and bad. It's absolutely possible to diversify your investments in such a way that even if an asset or two unexpectedly tanks your portfolio as a whole just shrugs it off and keeps on doing its thing. These two articles will help explain that mindset and approach:
How to Survive and Make Money in the Matrix
How to Study Portfolios When the Data is Full of Bubbles
Re: Investing In A Bubble
I agree, I-bonds are great as a "deep cash" portion of an emergency fund.Married2aSwabian wrote: ↑Wed May 05, 2021 4:07 pmAt 3.54% with zero risk, I can’t imagine a better way to invest $10k (for an emergency fund).
We’ll be buying some.
The electronic purchase limit it $10k per SSN. So if "we" is two of you, that's $20k.
Re: Investing In A Bubble
https://awealthofcommonsense.com/2021/0 ... -a-bubble/
When Facebook came public in 2012, the combined sales for the 5 tech giants was $290 billion. So in a little more than 9 years, the 5 biggest companies in the U.S. stock market have grown their sales by more than 310% or roughly 17% per year.
These 5 companies now make up around 22% of the S&P 500.
This is why the CAPE ratio is an imperfect valuation measurement. Yes, it smooths out the business cycles by looking at the average earnings of the past 10 years. But what earnings from the tech behemoths matter more to the market right now — the $290 billion from 10 years ago or the current $1.2 trillion?
Certainly today’s earnings.
Re: Investing In A Bubble
@ajcoleman22
I agree, it is a good time to hold low fixed interest debt as any increase in interest rates effectively negate it.
I agree, it is a good time to hold low fixed interest debt as any increase in interest rates effectively negate it.
Re: Investing In A Bubble
@marriedtoaswabian
Those rates are a lot higher than previous ones but from my perspective I would avoid US bonds due to currency risk. The dollar has last a great
deal against the pound in the last twelve months and with the Fed going crazy with the stimulus money, I think it will drop further compared to
other currencies and could drive inflation.
Those rates are a lot higher than previous ones but from my perspective I would avoid US bonds due to currency risk. The dollar has last a great
deal against the pound in the last twelve months and with the Fed going crazy with the stimulus money, I think it will drop further compared to
other currencies and could drive inflation.
Re: Investing In A Bubble
@tyler9000
I am a firm believer in a diversified portfolio and portfoliocharts is one of the websites that open to eyes to the benefits.
I had not seen that article before however and it looks very relevant...
I am a firm believer in a diversified portfolio and portfoliocharts is one of the websites that open to eyes to the benefits.
I had not seen that article before however and it looks very relevant...