What’s A Bubble? (Nobel Edition) | NPR

Bubbles_3DThe term bubble is in the market news a lot lately. What’s A Bubble? An interesting interview on NPR (15:37) with Nobel Laureates Fama and Shiller (who are polar opposites on this question and most everything else about economics).

Here’s a thought: When the Dow hit a high the first time at 10,000, was that a bubble at that time? At what higher close did it become a bubble? 12,000? 14,000?

Yes, at some point something unexpected happens and then prices are reset with that new news. This is basically Fama’s position. Shiller says that at some point, prices peak … that’s true. But he doesn’t know exactly when that would happen … so I’ll call that half a prediction.

The debate continues.

I’m in Fama’s corner on this … and these blogs explain the approach to the markets under this point of view.

Lots of poor investing discipline happens when one lets emotions rule decisions – fear or greed – either leads to extremes at times. Poor discipline costs you.

The Fama/French Forum

Photo:By Kuribo (Own work) [CC BY-SA 3.0], via Wikimedia Commons

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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3 Responses to What’s A Bubble? (Nobel Edition) | NPR

  1. Larry Frank, Sr. January 9, 2014 at 5:48 pm #

    An excellent article putting Dr Fama’s work into perspective by Dr Daniel Crosby http://wealthmanagement.com/investment/when-alpha-becomes-beta

  2. Larry Frank, Sr. January 12, 2014 at 6:13 am #

    Quoting a section from Jason Zweig’s article:

    “Another sign to watch for: In every bubble, there are always people trying to burst it by declaring that financial assets have become overvalued. At first, Prof. Goetzmann says, such skeptics earn respectful attention. But eventually, investors turn on them with anger and ridicule.

    Just think of Warren Buffett, who in 1999 and early 2000 was widely derided as “a dinosaur” and “out of touch” for his refusal to buy technology stocks. When I asked him in January 2000 how he felt about that, Mr. Buffett replied calmly: “I know what will happen. I just don’t know when.” Two months later, the Internet bubble burst.

    In investing, as in life, ridiculing the people who disagree with you is a fairly certain sign that you don’t have the facts on your side.

    “Once people buy in, they start to discount evidence that challenges them,” Prof. Goetzmann says. “There seems to be a hinge point where investors go from thinking about quantifying economic trade-offs to a kind of binary framework where anybody who disagrees with them is demonized,” he says.

    That is when a bubble becomes trouble.”

    http://blogs.wsj.com/moneybeat/2014/01/10/when-does-a-bubble-spell-trouble/

  3. Larry Frank, Sr. January 30, 2014 at 8:02 am #

    An interesting discussion with Prof. Gene Fama by Nobel Prize Talks, episode 7 (once on the page, you click the “Play” link) http://www.nobelprize.org/podcast/index.html

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