Investment general discussion thread

In My Humble Opinion
1021

ISTM until you’ve seen the depth and rapidity of the decreasing period, and observed the turnaround enough to suspect it’s got legs, you can’t define the bubbleness of the increasing period that preceded it.

Stocks crashing quickly after many years of slow steady growth? Crash or no, that prior growth was not a “bubble”.

Stocks decline a couple percent for a few weeks after a couple years of wildly exuberant above-trend growth? The growth might be a bubble, but it hasn’t burst yet, so we don’t know whether it is, or will be a bubble.

1022

I am an AI skeptic and am aware of asking AI for this data but it responds:

High-speed rises (>60% in 12–18 months)

Occurred ~7 times in the last 120 years.

Crash followed every single time (7/7).

Doublings in under 3 years (>100% rise)

Occurred ~5 times.

Crash followed in 4 out of 5.

(Only exception: mid-1940s, but a 30% drop did still occur afterward.)

Multi-year 200–400% expansions

Occurred 3 times (1920s, 1980s, 1995–2000).

Crashed 3/3.

Not sure how it defined “crash” though.

And the market is not quite meeting those levels of rapid rise. We are at 50% over the past two years. For that I get answered:

Only a couple of times in ~50 years
According to Nasdaq (via historical analysis), the S&P 500 has only had two two-year stretches where it rose more than 50%.

The first was 1975–1976, when the index jumped ~56.7%.

The second came during the dot-com boom, in the late 1990s.

Corrections did follow

After the dot-com era rally, the S&P 500 subsequently collapsed — in the early 2000s, the index lost nearly half its value.

For the 1975–76 period, economic conditions (recession, oil shock, etc.) make it complicated, but that rally was part of a broader cyclical rebound, not a risk-free “straight up forever” move.

Taken with grains of salt for accuracy…

1023

I feel like this is question somewhere between, “Does intelligent like exist outside of Earth?” And “How many angels can dance on the head of a pin?”

There’s really no definition of the “real value” of anything past “what the market decides” so, even if we were omniscient, we still might not be able to provide a truly factual answer.

But if you and I agreed to some definition then we’d still probably have a real hard time, short of omniscience, since value would still come down to factors like knowing the minds of everyone who works at the business and the sorts of decisions they would be liable to make in the future.

Ignoring all that, though, we could say things like that any time the market is undervalued and quickly rises back up to its “correct” value, then that wouldn’t be a bubble despite being a quick rise.

A first pass search for such a moment, we might do something like assume that everything should just grow at a static 7% a year (or whatever percentage looks to create a center line through history) and then then look at when the market average was above and below the line. A better search might compare to the GDP.

The chart here would imply that the period from 1995-1996 was a positive correction and the period from 1996-2000 was a bubble. Likewise, 2003-2013 was a positive correction.

But, the chart would also say that we were in “bubble” territory from, effectively, 1954 to 1974 (excluding a brief moment of correction in 1970).

I’m not sure that it makes sense to tell people to not invest for multiple decades at a time. If it was 1962, and we were in +2 std dev territory, then I’d probably advise a 20 year old to throw their money in the market but to lean more towards stocks that pay dividends, and to reinvest the dividends, but to watch for drops and pick up growth stocks if ever things are more in line with the expected market valuation. BUT, talking to a 90 year old, I’d advise strong caution because who knows if the end of the bubble will come in 2 years or 20? I’d probably suggest that they buy into REITs or something that just keeps up with inflation and pays out a bit extra as spending money.

Compound growth just isn’t so strong over short runs of time. At 90, even if things don’t implode, how much are you really likely to grow things before the sky opens up to take you away from the world? By your age, you basically have what you have. If it wasn’t quite as much as you hoped for…well, that’s just what fate and your choices through life left you with. It’s probably not going to get better and the risk of losing even that isn’t to be messed with.

1024

I’m not understanding the question of the market doing “this well” and not in retrospect having been a bubble to be about price relative valuation or even earnings, but just bottom line price, as represented by the S&P index and how it has performed.

Which isn’t to say that that graph of stock market value to GDP isn’t interesting. It is.

Still looking to understand what it means, let alone portends, better? The Mag 7 have insane valuations. Growth stocks in general are commanding high valuations relative to historical norms. And?

1025

Well, like I said, there’s no real meaning to “value”. Saying that we should expect the stock market and GDP to correspond is like saying that we should expect vacancies to correspond to applications. It’s probably not the worst model, but it’s still just a very simple model.

Like, money made is a factor of work put in. Work put in is a factor of worker supply and education level. So, whatever our GDP is this year, if we take actions to reduce the number of workers and reduce the quality of education, then we should lower revenue expectations for our forward calculations.

Likewise, the value of a stock is largely based on the value that you think you can sell it at in the future. If everyone wants to gain 10% and then sell in 1 week, then they’re valuing the stocks based on how likely they think the company is to suddenly swell in value over a very short time period. They’re looking for very specific companies and probably won’t buy in minus this sort of data. Prices will stay pretty low. Alternately, if they’re thinking to buy now and sell in 20 years, then high valuations and sudden news aren’t as important. The primary influences on value are the overall strategy, the main players, etc. You can buy high and still make a profit because, even though the underlying cash flow valuation won’t match the stock value for five years, you’re not going to sell for 20 and the cash flow valuation will be way past the current price by then.

As the popular consensus on what outlook you should be taking as you’re buying and selling changes, the value of stocks will go up and down.

GDP is a reasonable thing to compare against but the “true value” is a mixture of a whole lot of things like how far we’re looking into the future, what the average population growth rate is, what the school system is like, how optimistic people are about their future, how many regulations are in place and what the ratio is of positive regulations to negative regulations, etc.

1026

reminds me of the phrase I once heard (and found so true/funny that it stuckwith me for more than a decade now) …

Nuriel Roubini (Dr. Doom), who successfully predicted 8 of the past 2 recessions …

1027

So the answer to what that means is … bupkis?

I get the thesis presented by some: if history is a guide we are overdue to minimally have a significant correction bringing valuations. and that stock market value to GDP ratio, back to historic norms, or even over correct. It seems that the market overall is expecting AI to mature into something that massively increases GDP and profits very quickly and is priced in anticipation of that.

Or just seeing it going up and have FOMA.

In any case history is a poor guide to predict the timing anyway.

1028

Could be. I was once trying to see what the average compounding rate was of the full stock market and I couldn’t help but feel like there was a bend around 1980 that felt more like the compounding rate had sped up (e.g. due to computers) than that a long-term bubble had started.

It’s certainly thinkable that AI might throw in a new, advanced average rate of growth.

But, likewise, AI could herald the transition to post-scarcity, a universal income, and/or the end of finances outside of video game mechanics.

Or AI simply allows us to target true value more effectively and its primary force is to reduce volatility.

Or it spurs mass violence and chaos as people rebel against the technology, and we get restored to a world from earlier times.

I wouldn’t bet on having a good premonition.

1029

I’ve made a lot of money investing in stocks like NVIDA, Netflix, Apple, and Amazon. My logic is the powers that be will determine technologies that eliminate wages and keep people too preoccupied to storm their mansions and tear them limb from limb are “too big to fail”.

1030

Anyone and everyone like me with investments in S&P 500 or other large-cap index funds has made a lot of money investing in those stocks, given how much of those indices they represent.

1031

Yep. The S&P 5 or S&P 10 utterly dominate the remaining 495 or 490.

Which means the investing world has placed some very, very large bets on just a couple squares of the roulette tableau. So it’s an outcome that will either bear fruit, or bring disaster, or muddle on through. Just like always.

Y’all (including me of course) have paid yo’ money and we’re takin’ yo’ chances.

1032

My personal thesis is that 401(k) plays a significant role:

The first implementation of the 401(k) plan was in 1978

State sponsored, almost mandated, regular investment in shares is a boost for the stock market. 401(k) is heavily skewed towards US shares, and at about that time the Dow Jones, the S&P500 and the Nasdaq started outperforming other stock exchanges.
The outperformance had several hickups, as stock exchanges do. But if

As of 2019, 401(k) plans had US$6.4 trillion in assets.

that should have consequences, presumably positive ones for the share price development.

1033

I have the same thought, by the way. We have this torrent of money going in every Friday, and it seems most people have got the message regarding a low cost S&P 500 index fund. So this could be a kind of inflation, where PEs will have to adjust for the larger amount of cash in the system.

Good for those who got in earlier.

1034

Good points on the 401k-fueled influx of money over the past few decades.

Which leads to a question: what happens when the boomers liquidate their mutual funds, as mandated by law? My RMDs start next year. I will probably sell what I am required to sell, have my taxes withheld, and re-invest a portion of the money. But I may not put the funds back into the market.

1035

Huh, okay. So when I asked about the bubble, my conceptualization of what that means is maybe very different. What I see is a bunch of people investing a lot of money in a venture (AI) that is not sustainable and will never recoup the cost invested. My idea is once people figure that out, the bubble pops. People try to sell off all at once. Market correction, or crash, as you will.

Similarly the housing market collapsed because people were investing in something that was doomed to fail - securities backed by subprime mortgages. Complicated by the fact that, if I recall correctly, nobody really knew the mortgage backed securities were subprime.

Maybe that’s not the best way to conceptualize a bubble. I just thought it meant, “this thing people are betting on being widely successful is going to fail.”

And that’s kind of what I meant by this question. When we have periods of rapid growth and increased returns on investment at this level, which seems extraordinarily high to me (maybe it isn’t?), were there ever cases where that happened and it wasn’t a venture destined to fail?

And who are the biggest losers in this scenario? People about to retire? People who dumped all their money into OpenAI? You’ve convinced me that it’s not me.

1036

I think there was a lot of chicanery going on there. The MBSs were cleverly hidden in layers of repackaging. I suspect that quite a few people knew that this was a trick. And I also suspect that they have never been brought to justice for it and never will be.

It is possible that there is something analogous going on behind the scenes right now, but we will never know about it until the excrement hits the extractor.

At a guess, AI may be something like the dot.com bubble: the froth will peak, but may eventually evolve into useful technology.

1037

Everything I know about the housing collapse I got from The Big Short. Well, that and I was working for a consumer credit counseling agency in NYC at the time so I talked every day to people who got stuck with subprime mortgages. A lot of them were immigrants who didn’t really understand what they were getting into. It was a hectic time to work in that field, and the bankruptcy department in our agency exploded due to the demand for assistance.

Sad times.

I looked around at all that and thought, “I guess this is a good time for graduate school.” I wasn’t wrong, but I did get stuck with student loans at 6.5% interest. I didn’t know enough at the time to predict what a pain in the ass that would be.

1038

It wasn’t their fault at all. They hoped to buy a house and the ‘lender’ gave them a ‘loan’ even though they didn’t have the income or resources to sustain repaying it (and a reponsible institution should have been able to calculate that for them). The lending institution just wanted to originate an ‘instrument’ they could sell on to other financial operations…

As I’ve said, this was absolute fraud: but most of the perpetrators have never have been or will be brought to justice.

1039

I’ll never forget in about 2005 refinancing. Having been through mortgages before, I gathered up the pay stubs, bank statements, retirement account statements, etc. showing we were sound for the loan even before I applied. When I called the bank they said “nah, we don’t need any of that”

I thought that was really strange. A few years later I understood why.

1040

A good chunk of the Boomers have already been subject to RMDs; not having much negative impact so far?

Once upon a time I worried equities would be softening over this past decade as the Boomers en masse moved towards the more conservative positions advised for people approaching retirement … obviously my concern was unfounded.

I’m thinking we Boomers are just a greedy cohort. We don’t want to miss out on the run. And when we withdraw RMDs we put it in equities so that what it produces isn’t taxed, ever if it is left as part of our estate.

Then again the average Boomer doesn’t really have much in retirement funds so maybe just not a big impact?

Especially those who have both stayed heavy in equities and who haven’t enough to weather a major correction that takes a few years to bounce back. Especially if they are fairly standard issue folk who panic sell on the drop.