EC If Everyone Sees It, Is It Still A Bubble?

“If everyone sees it, is it still a bubble?” That was a great question I got over the weekend. As a “contrarian” investor, it is usually when “everyone” is talking about an event; it doesn’t happen.

As Mark Hulbert noted recently, “everyone” is worrying about a “bubble” in the stock market. To wit:

“To appreciate how widespread current concern about a bubble is, consider the accompanying chart of data from Google Trends. It plots the relative frequency of Google searches based on the term ‘stock market bubble.’ Notice that this frequency has recently jumped to a far-higher level than at any other point over the last five years.”

Everyone Sees Bubble, Technically Speaking: If Everyone Sees It, Is It Still A Bubble?

What Is A Bubble?

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth ‘real McCoy’ bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we’re in one.” – Jeremy Grantham

What is the definition of a bubble?  According to Investopedia:

“A bubble is a market cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. Typically, what creates a bubble is a surge in asset prices driven by exuberant market behavior. During a bubble, assets typically trade at a price that greatly exceeds the asset’s intrinsic value. Rather, the price does not align with the fundamentals of the asset.

This definition is suitable for our discussion; there are three components of a “bubble.” The first two, price and valuation, are readily dismissed during the inflation phase. Jeremy Grantham once produced the following chart of 40-years of price bubbles in the markets. During the inflation phase, each was readily dismissed under the guise “this time is different.” 

Everyone Sees Bubble, Technically Speaking: If Everyone Sees It, Is It Still A Bubble?

We are interested in the “third” component of “bubbles,” which is investor psychology.


A Bubble In Psychology

As Howard Marks previously noted:

“It’s the swings of psychology that get people into the biggest trouble. Especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic. When times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.”

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William K. 1 month ago Member's comment

"This time it is different." I think that Timothy Leary said that a few times after a few dozen experiments with LSD. The fact is that distorted vision certainly will make things look quite different. Distorted logic will also do that, and certainly greed distorts logic.

All of those folks following "the momentum" fail to see the similarity to a cattle stampede, in which the animals run because they see other animals running. Really though, humans should be much smarter than 900 pounds of steak on the hoof. Some of us are smarter, others have not yet learned by experience. I prefer to watch, and learn by other people's experience. Much less painful.

Lance Roberts 4 weeks ago Author's comment


William K. 4 weeks ago Member's comment

And thank You for the insightful article.