Here is another video and article about the bitcoin and its bubble.
1) Valuations deviate significantly from a long-term historical average
Luna points to the housing bubble as an
example of assets with established valuation metrics getting woefully
distorted. Decades of conventional wisdom suggests the "right" amount to
spend on a house is about 3x annual income. When people started quiting
their real jobs and buying 2 or 3 houses on margin, it was a sign
things weren't going to end well for houseflippers.
Related: Is it Better to Rent or Buy Your Home?
2) Analysts begin making outlandish predictions as assets hit new highs
Dow 36,000. Apple (AAPL)
hitting a trillion dollar market cap. Bitcoin becoming the world's
global standard for currency. All are examples of the kind of
predictions that get made at the top of an investing cycle, not the
bottom.
The prognostications seem like lunacy in retrospect, but were
conventional wisdom, if only for a moment. Remember: Splashy predictions
get headlines but slow and steady wins the race for investors.
"When you start hearing those things after a big a move in a stock,
whatever asset class it may be, usually is a tell-tale sign to head for
the exits," says Luna.
3) Everyone and their mother is the new expert on investing in this asset class
Luna notes that "every waiter" seemed to quit their job to become a
day-trader in 1999 or a realtor in 2005. When making money seems so easy
that amateurs start quitting their day jobs to make real money
competing against professionals, it's a good clue that a bubble is
forming.
4) People believe that “this time is different”
This time is never really different.
5) Political manipulation, unsustainable asset catalysts
It's no coincidence bitcoin's popularity came at a the same time the
meltdown in Cyprus was making fools of the world's Central Banks. When
political forces start impacting one group of assets, bubbles pop up to
fill whatever voids are left behind. Gold became a bubble because
currency was manipulated. Bitcoins popped up because Cyprus made it look
as though no form of "real" currency would be safe.
The odds never favor a political or policy-driven rush into assets
being sustainable. Eventually the free market wins out, and when it
does, bubbles violently deflate, leaving financial disaster in their
wake. That doesn't mean you have to be one of the victims. Learn from
history and recognize bubbles in real time.
What are your thoughts?
It is interesting to see the different signs of an investing bubble. I can relate to the "people believe this time is different" sign because that is a very optimistic way of looking at situations and people tend to take that approach acting freely and taking risks instead of taking the time to think before they act and act a little bit more pessimistic.
ReplyDeleteVery useful video/article! I think it is interesting that a sign of a bubble is professional analysts making optimistic predictions. For the average investor, they would see this as a reason to invest rather than hold back. Consumer confidence really does play a high role in demand!
ReplyDeleteThe tip given about everyone getting into the industry makes a lot of sense. People are going to try to make quick cash if its easy and obtainable. During the real estate bubble a good majority of my relatives/ family friends were in the real estate business in some form or another. Of course the hot money-making trend is not going to stay that way forever.
I think it would be very interesting to talk about this video in class on Tuesday, particularly the last part about political manipulation. What type of policial influences played a role in the real estate bubble?
I think it's kind of funny the way they depict how people react to it. You have some people going around telling everyone "times are different" all the time because of how optimistic they are history won't repeat itself. Also, the point about everyone and their mother becomes an expert from everyone becoming comfortable with it and adopt this idea it's perfect almost.
ReplyDeleteInteresting I wonder if the list will change as we experience new threats to our economy.
ReplyDeleteThe "this time is different" idea reminds me of the reverse gamblers fallacy, where people believe that the odds of failure decrease as more positive outcomes are added to a sample. Eventually though, as we have seen, failure does happen.
ReplyDeleteI'ts interesting to see people's very different ideas on Bitcoins and how they've become so mainstream. It's crazy how their value is so volatile. Here's an article describing how their value fell and everyone thought the bubble was going to burst, and then the value doubled and trade volume doubled in 2 hours.
ReplyDeletehttp://finance.yahoo.com/news/bitcoin-prices-rally-week-bubble-120400064.html;_ylt=A2KJ3CbN3HVRmA8AVniTmYlQ