On bubbles

[netnet]

Interesting article on bubbles. 

 

https://www.researchaffiliates.com/en_us/publications/articles/668-yes-its-a-bubble-so-what.html

 

It has a little history of the Zimbabwe currency hyper inflation and the gyrations of its stock market.  This is a very interesting article.  But I suspect that wiser heads, such as Munger would say that the trying to predict macro events is a fools game. Buffett in '68 said something to the effect, I don't make predictions, but when people are crazy, I do notices. Munger suggests looking at specific stocks/companies.  That said this article does provide a framework for this.

 

Note there is a  a skewering of Tesla thrown in:

 

Over the first quarter of 2018, Tesla has been an excellent example of a micro-bubble. Tesla’s current price is arguably fair if most cars are powered by electricity in 10 years, if most of these cars are made by Tesla, if Tesla can make those cars with sufficient margin and quality control and can service the cars properly, and if Tesla can raise additional capital sufficient to cover a $3 billion annual cash drain and another billion to service its debt. To us, that seems an unduly optimistic array of assumptions, especially given the magnitude of Tesla’s debt burden. Such an argument ignores the deep pockets of competitors and the common phenomenon of disruptors being themselves disrupted by newcomers. Absent the unfolding of this rosy scenario, Tesla’s current price would require remarkably aggressive assumptions to deliver a positive risk premium. For investors who agree with this assessment, Tesla constitutes a single-stock micro-bubble.

 

I'm putting this in although I know it will derail the larger arguments of the article.

 

Edit, hyperlink added

[rolling]

Seems interesting, but where is the article? Thank you

[Jurgis]

Pretty much zero valuation analysis and then claim that FAANGTB are in bubble. At the time when Buffett is buying one of the As.  ::)

 

[Cigarbutt]

Pretty much zero valuation analysis and then claim that FAANGTB are in bubble. At the time when Buffett is buying one of the As.  ::)

 

Jurgis,

I see your point but find that your judgement is quite severe.

The FANG part of their "analysis" is poor on the quantitative side but I thought they nicely underlined two interesting concepts:

-the future is hard to predict, especially longer term

-there is a tendency to forecast using simple extrapolation of recent trends

 

If you look at the top ten capitalizations over time, the list has been quite dynamic and I submit that it may be reasonable to expect that trend to continue. :)

 

I thought their line of reasoning helps to add perspective and was similar to what Semper Augustus discussed in their last annual report (34-37) "Many shall be restored that now are fallen and many shall fall that now are in honor". Not all of them though.

https://seekingalpha.com/article/4151002-semper-augustus-investments-group-2017-letter-clients

 

For the original Research Affiliates article:

https://www.researchaffiliates.com/en_us/publications/articles/668-yes-its-a-bubble-so-what.html

 

 

[Jurgis]

If you look at the top ten capitalizations over time, the list has been quite dynamic and I submit that it may be reasonable to expect that trend to continue. :)

 

So you buy total market index and short top ten companies to remove them from the index.

 

Insta profit and outperformance.  8)

 

 

For sarcasm impaired: yes, it is. Or not. You can try it. Maybe it will work.

[stahleyp]

What does a bubble really mean? It is a busted business model or just a large adjusting to valuation? If it's a busted business model, I don't think that applies to the FANG stocks. If you're talking about lowering of a valuation, well, I don't have much of an opinion there. I could see that happening pretty easily either through a tough economy, tougher monetary policy or government intervention.

[Jurgis]

What does a bubble really mean? It is a busted business model or just a large adjusting to valuation? If it's a busted business model, I don't think that applies to the FANG stocks. If you're talking about lowering of a valuation, well, I don't have much of an opinion there. I could see that happening pretty easily either through a tough economy, tougher monetary policy or government intervention.

 

Author's definition:

 

We define a bubble as a circumstance in which asset prices 1) offer little chance of any positive risk premium relative to bonds or cash, using any reasonable projection of expected cash flows, and 2) are sustained because investors believe they can sell the asset to someone else for a higher price tomorrow, with little regard for the underlying fundamentals. Notably, there are markets in which few, if any, buyers care about discounted future cash flows to value the asset. In order to identify a market bubble, we need to strongly believe our definition applies. Borderline calls don’t qualify.

 

Accepting this definition, I don't see how 3/5 of FAANG "offer little chance of any positive risk premium relative to bonds or cash, using any reasonable projection of expected cash flows".  ::)

 

BTW, it was authors who included Apple in FAANG. It wasn't me. Although it does make my case easier. Otherwise, I would have said 2/4.  8)

[Jurgis]

BTW, this seems like a good thread for:

 

https://www.bloomberg.com/news/articles/2018-06-04/apple-s-1-trillion-chase-unprecedented-try-totally-logical

 

Ignore the headline (or accuse me for promoting a bubble  ;D ). The article actually has some good numbers and charts.

[Liberty]

Good read:

 

http://theirrelevantinvestor.com/2018/06/30/the-ghost-of-tech-stocks-past/

 

Qualcomm rose 2,619 percent in 1999. Twelve other stocks on Nasdaq that started the year over $5 managed to climb at least 1,000 percent. A further seven issues rose at least 900 percent.

[Jurgis]

Good read:

 

http://theirrelevantinvestor.com/2018/06/30/the-ghost-of-tech-stocks-past/

 

Qualcomm rose 2,619 percent in 1999. Twelve other stocks on Nasdaq that started the year over $5 managed to climb at least 1,000 percent. A further seven issues rose at least 900 percent.

 

+1