

The Art of Riding the Bubble - pathik
http://smoothspan.wordpress.com/2011/03/24/the-art-of-riding-the-bubble/

======
PaulHoule
Like most articles about bubblenomics, this one misses the real point.

When the financial system becomes dominated by bubbles, it is unable to
allocate capital effectively. You get a "lost generation" of businesses which
could have used capital more profitably than the ones who did get funded.

Like anyone else who shirks their job, capitalists who participate in bubbles
ultimately won't get paid for the labor that they're not doing.

Worse than that, it's quite possible that more financial capital exists than
there is actual demand for investment. In that case, capital should be
rerouted towards taxes or higher wages for workers: perhaps we'd be better off
with a lower national debt and if Joe Sixpack is better paid, businesses can
compete to offer him new and better products and services, creating new
opportunities for businesses to succeed and wealth to "trickle up".

------
RyanMcGreal
> But if all you’re doing is asking whether there is a Bubble, the Bubble is
> probably not here, yet.

Correction: by the time you're asking whether there is a bubble, the bubble is
already getting ready to burst.

~~~
Swizec
Situations where "If you have to ask, the answer is yes" are truly a horrible
thing. A lot of people forget to trust their gut instincts and try to ride
something that is ultimately unridable.

So what's a guy to do in a bubble anyway? Starting a company sure sounds like
it might work out pretty well, but the problem is the bubble will likely burst
before you manage to bail. Going about your everyday life like nothing's
happening will likely leave you with feelings similar to coding away in a
basement with a beautiful day just out the window ...

~~~
RyanMcGreal
You've hit on the real problem with bubble analysis: for most people most of
the time, knowing we're in a bubble doesn't actually help you decide what to
do about it, since we don't know when the bubble will burst.

It's a great idea to invest during the frothy phase of a bubble - _as long as
you cash out before the crash_. The trick - the risk - is predicting when
that's going to happen.

I realized we were in a housing bubble back in 2004, but aside from sighing
when friends bought houses as "investment vehicles", I wasn't able to put my
realization to much use. I was right about what was going to happen but dead
wrong about _when_ : the bubble ended up inflating for another four years,
time during which I could have cheerfully flipped properties at great profit
had I been able to know in advance when the market was going to peak.

Back in the late 1990s, I remember watching people buy Nortel shares at $100+
per share and thinking they were absolutely nuts - but some of those people
sold at the right time and still came out ahead (while others saw their
investments collapse to pennies on the dollar).

In both cases, knowing we were in a bubble gave me no competitive advantage.

~~~
khafra
Anybody ever tried applying the Kelly Criterion to investing in a bubble? That
is, <http://en.wikipedia.org/wiki/Kelly_criterion> with the "fraction of
bankroll" being the amount of your portfolio invested in the bubble? That way,
you could rebalance regularly to avoid subjecting an undue amount of your
retirement fund to the riskiest parts of the market, but still reap some of
the benefits.

~~~
jsn
Kelly criterion has nothing to do with bubbles (it says nothing about timings,
and the main challenge of bubbles is timing). Also, Kelly criterion uses odds
received and probability of winning, and you don't have anything like that in
the stock market, bubble or no bubble.

~~~
khafra
The Kelly Criterion is for making repeated bets on similar offered odds and
probability of winning. Admittedly, it's harder to calculate your probability
of winning in a stock market bubble than it is at the roulette wheel; but you
can still do your best and use that number.

If the rest wasn't clear, your offered odds are the delta in stock price minus
the transaction costs.

~~~
jsn
Neither the (future) stock price delta nor the probability of movement is
known to you in advance.

------
BobWarfield
The answer to your concerns about riding the bubble is not to ride it.
Momentum investing has always been riskier than growth investing. There are no
Momentum Warren Buffets.

However, at the moment, VC is obsessed with Momentum, and that's really the
point of the post. That will change eventually.

Cheers,

BW

------
eagsalazar
From the point of view of investors and entrepreneurs looking to cash out
before the crash, I agree that riding the bubble is risky business. However
for entrepreneurs with a solid business plan that involves long term revenues
and growth, the business can be largely immune to bubble vagaries while still
being able to take advantage of readily available investment capital during a
bubble.

