Well, I would not agree that the recent bubble was based on the extension of credit. However, it is an easy assumption to make.
I think there were many factors leading to this one. Not least of which was the reduced cost of investing and the expansion of the investing "audience". Most people (even now) view their investment accounts as their savings account. Quite a change from 10 years ago. And not even necessarily a good idea. Even as I had money parked in the bank, I had friends screaming at me how stupid it was with equity returns of 20+%.
I believe in balance. Most people don't. That doesn't make them wrong...just less risk averse.
As for "knowing" when there is a bubble. Well, I agree that it COULD be common sense. I tend to lean on the lemming condition...if I see EVERYONE running into something I consider speculative - there must be something I'm not interested in there.
LINUX was particularly funny because it had NO SHOT at ever getting the returns MSFT did due to its open structure. It couldn't create a monopoly in the form of MSFT. Yet people wanted to believe it could. Still, Kudlow isn't wrong. Speculation is necessary for the liquidity of markets and fluidity of transfers. Therefore, there is technically no such thing as a speculative bubble. It is possible to point to one and describe it after the fact, but there are few technical means of determining one while you are in it, and there are even fewer to explain it after the fact.
Manias, Panics and Crashes did indeed point to the extension of credit for the creation of several bubbles. But it wasn't effective in giving guidelines for avoiding them, or even knowing when they are occurring. As a result....it is useful as an ex post facto tool of comparison, but not as a guidebook.
Where it IS useful is from the standpoint YOU used - common sense. However, before you can use that....you have to define common sense. I don't think that represents a feasible standpoint from which to build a case. My common sense is not yours, nor is it my neighbors'.
I think your basic assumption is correct - there are ways to tell (as I've said, I didn't put a dime in a dot com, and advised my father in law to avoid AMZN, RHAT, and YHOO [he invested in YHOO at 200...and felt sorry afterward]) if you are astute and willing to take a leap of faith of common sense against common wisdom (if everyone is buying - why shouldn't I? Because it's against my better judgement).
By the way, there is a portion of Manias that I DID use. One thing that was clear throughout the book, is that GOOD COMPANIES will survive, and always do well EVEN AFTER the bubble bursts. That is why I have focussed my investments on AOL, GE and ORCL.
Solid companies, solid positions in their industries. |
