This is the 5Th year of the Bull Run and the question is when it’s going to crash again? Is there a market bubble in making or already floating? What does this investment bubble look like? Can we identify whether it’s a bubble or a real thing? Bubbles definitely burst and devastate the surrounding. How to identify and save one’s investments from this bubble. Let’s bubble the bubble.
Everyone knows how investment bubble wind up. We’ve seen the boom-bust scenario time and again, going back to the tulip mania in 17th-century Holland. More recently, we withstood the tech wreck of 2000, which decimated dot-com stocks, and the real estate bubble of US that collapsed our markets in 2008, pulling the Sensex down by 57% and ushering the world in recession.
Currently, we all saw how markets have refused to go down despite FIIs pulling money for more than 9 months in a row. GDP is going down, ruling party is in turmoil as their few own have become stone pelters. Despite this the list of billionaires is increasing. MF flows are insanely high. Are there any signs here?
Outside the stock market, cryptocurrencies went on steroids. Bitcoin, the digital currency is up 675% since January. Although it crashed 300% in last 40 days. The world is talking about how US and allies have shut their eyes and ears to N Korea because they do not want to hamper their own economic growth.
So what is this Bubble?
The exact definition of a investment bubble depends on whom you ask. But it’s safe to say bubbles are more than inflated prices alone. They’re marked by the narratives that circulate about them. Stories around them make them interesting.
Look at the Bitcoin story: There’s a mythological inventor whom no one can find, lending an air of mystery. The freedom from government control appeals to independent-minded people. And the blockchain technology (the virtual ledger of digital currencies) “sounds so clever and so modern”.
Robert Shiller, the Yale professor, and Nobel laureate says- Tales of fortunes being made, often with a new-era twist, are accepted as justification for price increases and a reason to expect more, drawing ever more investors in, he says. Our human tendency to compare ourselves to others makes us vulnerable.
“Attention to others’ successes, and perhaps feeling left out, is part of the emotional ambiance of a bubble,” says Shiller.
Stocks? There is a good story too.
People are buying Avenue Supermart (Dmart) at a 75 PE just because the story of Promoter Radhakishan Damani is inspiring.
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But in stock markets timing is tricky. Bubbles can go on for a long time, and it’s hard to know when they’ll end.
How to Identify Investment Bubble?
Many researchers say and believe that it’s impossible to recognize a bubble when you’re in one. People can see bubbles in hindsight; the problem is we don’t see them when it matters.
Bubbles are made in front of eyes but participants do not rely on this. Reason- Behavioural Blind-sightedness. The market is so unemotional and dull that it follows the same pattern. This pattern is similar across geographies and asset classes. Only the prices and time variables may change.
Typically bubbles are formed in the last stage of the “Mania Phase”.
See the pic below:
What to do when you feel a investment bubble is in creation?
Expert agrees that the best defense against a bubble is a diversified portfolio. That helps ensure that losses in one sector or asset class won’t sink you overall.
The advice may sound too basic, but it works. Just as watching your weight, exercising and not smoking are dull but dependable ways to stay healthy.
See how assets classes have behaved in the 2008 fall.
Are you really thinking that you or your advisor could have moved you away for an equity portfolio and invested in gold? If someone claims he did it – its Luck or Lie.
Same way diversifying your investments in accordance with your risk tolerance and stage in life will keep your portfolio from taking a turn for the worse.
Some points worth thinking & applying:
- Majority investor does not know the risk of equity that they have in their portfolio. If you do not know the quantity what are you going to hedge?
- Majority investor (barring the financial planning way investors) have never done or faced a risk tolerance test. They have never discussed the risk part with a financial planner. So it is like the bare chest in war zone anticipating an arrow from anywhere. But what if instead of the arrow, the enemy throws a hand grenade?
- Problem with horizon: Warren Buffet says: Buy those stocks, if the stock markets close tomorrow for 10 years you will not be panicked. Now this means 2 things for an investor.
First, you should be convinced that the stock or equity is for long term only. This is behavioral sciences. The worst-case scenario should be obvious. Long-term portfolio allocation science dictates only a small percentage of assets in cash, so as much as 90 percent to 95 percent of most portfolios are subject to huge short-term losses.
Secondly, In case to survive 10 or more years without gains, one should have reasonable cash. This is budgeting and having a contingency fund. In the US and in India too, when 2008 occurred many investors had huge EMIs running. They had booked multiple flats/residences. When the property tanked they had no way to meet obligations.
HAVE YOU worked on the above mention 3 points? If yes 2 more pointers for “real investors“
4. You have to be in correct asset. This way you have positioned yourself to withstand the stomach-churning anxiety that accompanies a market bubble.
5. Build market correction in your perspective. There is difference between an unrealized and realized loss. An unrealized loss (during investment bubble burst) is a paper loss representing the difference between the price of a stock when you purchased it and its current price. A realized loss is an actual loss, When you sell below purchase price. If you are not selling – THERE IS NO LOSS.
I am not saying here that a bubble is about to burst but yes bubble is in making. A step today will save a lot of anxiety.
So hope this article gives you confidence for long term investments and tackling speed bumps. Will wait for your comments and your experiences.