This story was written and paid for by Mindful Money, a Berkeley wealth management company that is committed to a behavioral and mindful approach towards financial wellbeing.
From a general theory of markets perspective, you can’t be in a bubble if people are asking if we are in a bubble. People only ask if we are in a bubble when they are afraid to keep capital in their portfolios or commit new capital to their investments. This means either:
- They have assets that have gone up substantially in value, which they are considering selling (some of them will sell), or
- They have the capacity to commit capital to their investments – and they aren’t doing it.
Bubbles form because we buy WITHOUT considering valuation. Bubbles exist when we aren’t worried about bubbles. Those asking questions about bubbles are, by definition, worried about valuation and the potential for bubbles. It can’t be a bubble when people are afraid to invest. Perhaps the best simple definition of a bubble is the following:
We know it’s a bubble when we have collectively thrown caution to the wind and become more concerned about missing out on the next leg of returns than we are about losing the assets we have already accumulated.
We’ve been getting the “are we in a bubble” question since 2014. We weren’t in a bubble then and, while things certainly are not “cheap,” there are certainly specific investments that are looking frothier these days.
How do we spot a bubble?
I am a fan of William Bernstein’s four-part list of bubble markers because it delves into the culture and changes in human relationships that occur as a bubble inflates. Do you see these four today?
First, financial speculation becomes part of everyday conversation. The frothy investment is on the front page of every paper, is part of every broadcast, and is a question for every financial podcast guest. Your uncle, who has never spoken to you about an investment of any kind, casually brings it up in conversation. Consider the “new paradigm” talk during the dot.com boom of the late 90s and the steady drumbeat of real estate headlines in 2005 and 2006. Then, ruminate on the recent fascination with the GameStock trades, Tesla, SPACs, NFTs, and bitcoin.
Second, look at the career changes as people leave perfectly good day jobs to chase the easy-money dream. In the late 90s this took the form of day-trading internet stocks. In the early 2000s non-working spouses all got their real estate sales licenses in order to start flipping houses. Now, ponder today’s TSLA, GME, SPAC, and crypto traders. They may not have quit their day jobs, but many are margining their federal stimulus checks to buy and sell stocks while working from home.
Third, a cult begins to form around the believers. The cult becomes the “us” in an us vs. “them”…
Read More: Are the markets in bubble territory? How do we know?