Monday, February 24, 2014

Anatomy of a Bubble

Before its time? Now they could deliver chihuahuas by drone.

Paul Krugman blogs about bubbles today, apropos of FED navel gazing. Krugman's right: Bubbles are all about herd behavior. What's more, herd behavior pressures even the faint at heart to "buy" the bubble, both actually and academically.

In my own life, I was a classic case. I bought the tech bubble of the late 90s, literally. As a tech columnist back then, I was enamored of both the new online brokers -- I started investing with eBroker (now TD Ameritrade) in 1996 -- and tech mutual funds and stocks. I bought them, wrote about them, bought some more. When the first tech bubble popped, I bought more on the dip, only to watch all that go to hell in another huge fall. Ouch.

I was lucky in that I bought early enough that I wasn't wiped out -- I still came out up if not on top.

Now, with the housing bubble I was once stung, twice shy. I didn't buy the bubble, and I was warning friends and family that there was a bubble, and much to my chagrin, they ignored me and bought anyway. Some did okay, some got wiped out.

So what did I do? In classic herd fashion, I gave in when the market refused to crash. I did, wisely, go out of my steaming-hot California market up to Portland, Oregon, where the prices weren't insane. I bought there because I HAD TO and I didn't want to get burned.

But of course I did get burned. But only a little.

Funny thing is that California bounced back sooner, and Oregon's market stayed soft longer than many places in the country. However, I had put a serious down on my Portland place and was never underwater and, since 2005, I've been without a tenant for a solitary month. Now prices are back to what I paid then. I'm okay, partly through luck, partly because my bubble paranoia caused me to be only half-crazy when I chose to get into the market.

Coincidentally, I bought in Sonoma in the dip, paying 40% or more below the highs. As with all buying-at-the-dip, I actually bought 30% above the real dip. Why? A dip is either a trough or a ledge; you only find out which later. As in Portland, my valuations here are back above what I paid.

Lucky or smart? I was a bit of both. The lucky part was I didn't lose a job or get sick or anything that would have scrambled my strategy or smacked me down at an inopportune time. The smart part was that I kept reading Case-Schiller and most especially the Anderson Forecast out of UCLA that called the real estate bubble a long time before others. I also read Calculated Risk religiously. They also called the bust early.

What's the next bubble? I think it's social media. Of course, in the tech bubble years I bought infrastructure, you know, hardware, networking, software, etc. I thought Amazon, Yahoo!, Google, and eBay were crazy investments, and I hated Apple with a passion -- I despised Apple's elitism -- and never thought it could fight its way out of the hole it was in. So my call on social media -- I have no stock in any of them -- might be dumb. I've been dumb before!

My only serious anti-bubble play lately has been to double-short gold. I'm still in the money on the play, but it's slipped lately. Why, I don't know. I think gold is for gold bugs, and gold bugs are fueled by paranoia. I'll stick to my guns, but who knows who's right? If gold slips hard again, maybe the herd will carve out my profits for me. C'mon, gold, let's unbubble!

Note. Many feel that we're in a stock bubble right now. I'm a little concerned about it myself. What keeps me calm, though, are the 10% pullbacks we experience before chasing new highs. I interpret that to mean this secular bull market has legs. Also, corporations are sitting on cash because of slack demand, and potential and actual GDP remain far apart. When we finally emerge from this jobless recovery, corporations will take that cash and invest in new equipment and inventories. That will lead to jobs, better tax revenues, more infrastructure spending, government rehiring, and, boom, the bull market rolls on.

Or not. I've always been a betting man, albeit a cautious one. Still, I'm in and staying long. Except for gold...

If Glenn Beck's long, I'm so short...

A Final Note. During the tech bubble I read about the Tulip Mania in 17th-century Holland. With no small amount of irony, I made the connection between tulip bubble and tech bubble and I STILL DIDN'T EXIT THE MARKET. Dumb and dumber, oh well. Bernanke and Geithner missed the housing bubble.

No comments:

Post a Comment