Author Topic: Teach me: How to spot a 'bubble'  (Read 4169 times)

FrugalFisherman10

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Teach me: How to spot a 'bubble'
« on: August 03, 2017, 11:56:43 AM »
Obviously if "it were that easy, everyone would have done it" (pertaining to the last housing bubble, or the stock market bubble before that, etc.)
but still...

I'm looking for some good 'go-to' metrics and calculations to help me understand a market I'm evaluating at any given time. I want to learn a basis for how to form my own opinions about valuations.
Primarily:
a) the overall stock market, and
b) my local real estate market.

And I want a 'simple approach', as much as you can keep it to that.

I'm good with math, and have a background in accounting and finance, so throw at me what you would look at to evaluate the current state of a market.
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For the stock market it may be something like "calculate P/E10, like this:  Ok, not compare it to .."   what? Past P/E 10s? some other metric? What makes sense there?
Is this identifying just 'value' (overvalued vs. undervalued), or can it indicate some sort of 'bubbly nature' of a market?

Also helpful would be to point me in a direction of decent data. Like in the case of local real estate, where could I find a reliable indicator of 'supply vs. demand'? 'average listing price vs. sold price, over a time period' etc.?
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slight rant: The reason I'm wanting this is because of the conundrum I feel I am always in of 'where to put my money and when.' Yes, to some extent you could say I'm wanting to time the market - both my local real estate market and the total stock market. But more so I would like to just know what moves I'm making and why. "No moves" is still a move!
If I decide to hold some money outside of the market for a while, in an effort to build up a down payment, I want to do so with my eyes wide open. (BTW, to do so currently would feel like I was both missing out on record setting highs/gains in the stock market, and buying an over priced house...sweet
)

MrSal

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Re: Teach me: How to spot a 'bubble'
« Reply #1 on: August 03, 2017, 02:52:23 PM »
Its more about the global perception of the actors of the market than just metrics.

Euphoria usually comes with a top of a market.

I myself use the contrary indicator to spot big tops/bottoms.

Examples:

During the Euro vs USD bottom in 2010 some big covers that usually appeared on general public magazines about the Euro, could signal the contrary.

Why is this? When even a general magazine has gone in the bandwagon to even put a certain subject in the cover of their publication, it probably means everyone else of interest has already been in the same camp... the trend is probably exhausted so the opposite usually happens.



In 2005, the same happened with I believe Times magazine nominating Person of the Year in 2005 or 06 i can't remember the "Homeowner" for being the best investor. It signaled exactly the opposite...

This to say, that a bull market can start from valuations that you don't deem undervalued or overvalued ...
« Last Edit: August 03, 2017, 02:54:03 PM by MrSal »

YttriumNitrate

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Re: Teach me: How to spot a 'bubble'
« Reply #2 on: August 03, 2017, 07:03:48 PM »
If my relatives are talking about something financial at Christmas, that is my #1 cue that that sector is in a bubble near bursting. Christmas 2016 was uneventful, so my prediction is no bubbles bursting in 2017.

obstinate

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Re: Teach me: How to spot a 'bubble'
« Reply #3 on: August 03, 2017, 09:54:37 PM »
You cannot spot a bubble. If you could, everyone who is smarter than you at finance (which, if you're asking this question, is a lot of people) will already have spotted it and gotten out.

geekette

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Re: Teach me: How to spot a 'bubble'
« Reply #4 on: August 03, 2017, 11:01:45 PM »
Yeah, the only sure way to spot a bubble is in hindsight.

Finances_With_Purpose

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Re: Teach me: How to spot a 'bubble'
« Reply #5 on: August 04, 2017, 12:59:42 AM »
You cannot spot a bubble. If you could, everyone who is smarter than you at finance (which, if you're asking this question, is a lot of people) will already have spotted it and gotten out.

Indeed.  As others said, you spot it in hindsight.  Trying to on the front end is almost a fool's errand, especially outside of technical experts who specialized in that exact market. 

Even if you spot one, there's always the question of timing: it might continue as a bubble for the rest of your natural life. 

For instance, government debt is a huge bubble right now (I think)....yet it has been one for quite a while. 

Japan has a HUGE debt bubble: they're over 200% of GDP.  Historically, no nation has sustained that for long.  Ever.  But Japan has been in a bubble for 20 years now...  (One financial writer calls it "a bug in search of a windshield," but the bug sure has hung on...) 

2Cent

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Re: Teach me: How to spot a 'bubble'
« Reply #6 on: August 04, 2017, 01:16:34 AM »
You cannot spot a bubble. If you could, everyone who is smarter than you at finance (which, if you're asking this question, is a lot of people) will already have spotted it and gotten out.
Not true. The problem with bubbles is that they can stay inflated for years even if you can see them plainly. So this is no use to the short term investors. The USD and Euro are bubbles, but they could just keep going for a 100 years without bursting.

gooki

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Re: Teach me: How to spot a 'bubble'
« Reply #7 on: August 04, 2017, 01:42:28 AM »
Bubble = buying for speculation
Not bubble = buying based on the underlying value and expected returns

Finances_With_Purpose

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Re: Teach me: How to spot a 'bubble'
« Reply #8 on: August 04, 2017, 02:51:10 AM »
You cannot spot a bubble. If you could, everyone who is smarter than you at finance (which, if you're asking this question, is a lot of people) will already have spotted it and gotten out.
Not true. The problem with bubbles is that they can stay inflated for years even if you can see them plainly. So this is no use to the short term investors. The USD and Euro are bubbles, but they could just keep going for a 100 years without bursting.

That is indeed the problem...even if you spot it, it's impossible to know just how long it'll last.  Two years?  Ten?  Twenty?  Two hundred?  2Cent is dead on, especially re things like currencies - very very difficult to predict. 

Knowing the "when" (i.e. during my lifetime?) is often more important than knowing the "what" (i.e. bubble). 

Acastus

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Re: Teach me: How to spot a 'bubble'
« Reply #9 on: August 04, 2017, 09:50:21 AM »
It is very easy to spot the bubble once it has collapsed. It is very hard to predict the future, so spotting it ahead of time is nearly impossible. The old joke, analysts have predicted 9 of the last 5 recessions, is also noteworthy. Most people panic when they don't have to, and they miss the good times more than they protect themselves against bad times. You are better off just riding out the bumps than trying to avoid the dips.

That said, the current guy in the White House is the closest thing I have seen to a black swan in a long time. I cannot figure out when he will cause financial trouble, but I am pretty sure something will happen. I sure hope I am wrong.

Spork

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Re: Teach me: How to spot a 'bubble'
« Reply #10 on: August 04, 2017, 10:21:43 AM »
It is easier to teach someone not to care about a bubble than to spot a bubble.

Bubbles really only matter if you're doing short term market timing trades.  If you buy stocks/funds based on the idea "I want this stock for the next 10+ years" ... the bubbles are just a fizzy head on a nice beer.

obstinate

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Re: Teach me: How to spot a 'bubble'
« Reply #11 on: August 05, 2017, 06:03:54 AM »
The USD and Euro are bubbles, but they could just keep going for a 100 years without bursting.
That is not how most people define "bubble," and it's a pretty useless definition.

FrugalFisherman10

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Re: Teach me: How to spot a 'bubble'
« Reply #12 on: August 07, 2017, 09:26:29 AM »
Knowing the "when" (i.e. during my lifetime?) is often more important than knowing the "what" (i.e. bubble). 
I appreciate the sentiment that it is more important, and nearly impossible to determine, when a bubble is going to burst. That's something I hadn't fully appreciated prior to this thread.

Nonetheless, I don't think it's impossible to spot one..to spot the 'what'. And I do think that has more value than you all are making it out to be. I think the substance of EMH-type thinking may have overreached its bounds a bit in the responses so far... i.e., sure "you can't beat the market with any sort of stock picking because all information is available information, people are informed and act rationally...and even if you could here and there, you couldn't over the long term because fees"...but to say the same extends to practically everything else seems an exaggeration.

What I mean is I get the impression that each type of marketplace has 'fundamentals'. maybe those fundamentals are unique to it, and if the marketplace is small enough (say a given city and its real estate for 3bd/2ba houses), they could truly give an indication of 'bubble' vs. non bubble. AND you could reasonably choose to enter/forego entering a bubbly market with the intent of value-capture.

I guess it would help to define 'bubble' here, as I don't even hardly know a functional definition of it and it seems some of us disagree as well.
The USD and Euro are bubbles, but they could just keep going for a 100 years without bursting.
That is not how most people define "bubble," and it's a pretty useless definition.
We'll use this one from Investopedia:
A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.
Read more: Bubble http://www.investopedia.com/terms/b/bubble.asp#ixzz4p5DyZoub

If a bubble were to last 100 years, you're all correct and there would be no actionable way really of taking advantage of it in one's lifetime.
But I feel like business and economic cycles indicate that bubbles won't last that long, and if I'm talking about buying into real estate, I do have an ultra long horizon (basically an infinite horizon for the sake of argument, as I will always need a place to live, as long as I do.)

There's only one time in your life that being in a 'buyer's market' vs. 'a seller's market' really matters, and that's when you haven't yet become either. (and even then, renting (anything) put's you more aligned with the interests of sellers, so you can never really arbitrage on the idea of being a buyer in a buyer's market, or a seller in a seller's market.)

czr

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Re: Teach me: How to spot a 'bubble'
« Reply #13 on: August 07, 2017, 09:45:07 AM »
I am 1 for 1 in spotting bubbles so I am a bubble spotter master batting 1,000. My qualification is that in 2005, I was house shopping and was being grossly overbid so I said I will sit this out and rented for 5 years and bought a property in 2010.

My simple advice is:

For the stock market: keep contributing to the market via index funds every paycheck and never sell. When the market tanks, contribute more.

For the housing market: save up a ton of cash in savings account and wait until the next downturn comes. You will know when there is a ton of lis pendens and foreclosure activity then make a purchase.

In order to do the above, you will need to be very disciplined and have very good cash flow and cash reserve. Oh and you have to be in good health and survive any financial emergencies and not get laid off when the shit hits the fan so there is a lot of luck involved too. =)

cerat0n1a

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Re: Teach me: How to spot a 'bubble'
« Reply #14 on: August 07, 2017, 10:12:34 AM »
You cannot spot a bubble. If you could, everyone who is smarter than you at finance (which, if you're asking this question, is a lot of people) will already have spotted it and gotten out.
Not true. The problem with bubbles is that they can stay inflated for years even if you can see them plainly.

Exactly. Being able to see a bubble and being able to make money from it are not the same thing.

There were plenty of commentators (correctly) pointing out the dotcom bubble in the late nineties. Those dotcom shares kept going up and up for a couple of years more though, right up to the point where the bubble burst.

Ireland had a huge property bubble in the early 2000s, with at one point one in eight of the workforce involved in house construction, building more houses per year than the UK (which has something like 15x the population.) Obvious to everyone and the OECD and central bank were warning about it in 2005, but it took until 2009 for the crash to happen.

https://en.wikipedia.org/wiki/Irish_property_bubble

The story of Isaac Newton and the South Sea Company bubble is instructive.

Milkshake

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Scortius

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Re: Teach me: How to spot a 'bubble'
« Reply #16 on: August 07, 2017, 01:13:18 PM »
Cryptocurrency may be a good example at the moment, specifically because the current value isn't based on a specific fundamental measure of utility, rather most of the recent gains have been due to pure speculation. That doesn't mean things will crash as predicting a bubble is a fools game, but it is an example of a market that isn't based on well understood financial metrics.