Morgan Housel - Bubbles and a Strategy to Protect Yourself

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Fremdon Ferndock
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Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by Fremdon Ferndock »

Interesting article about market bubbles and why your investment strategy is what matters:
• Bubbles are not anomalies or mistakes. They are an unavoidable feature of markets where investors with different goals compete on the same field. They would occur even if everyone was a financial saint.
• Bubbles have less to do with rising valuations and more to do with shrinking time horizons among people playing a different game than you are.
• Protecting yourself as an investor is mostly a function of understanding and acting upon your own time horizon, accepting that other people’s goals are different than your own.
https://www.collaborativefund.com/uploa ... ubbles.pdf
"Risk is what’s left over when you think you’ve thought of everything." ~ Morgan Housel
TheGiantess
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by TheGiantess »

Interesting article. Thanks for posting it. I understand what he is saying but I don't understand what we as long term investors are supposed to do about it. What do you think his advice is to someone saving for a 40 year retirement? Thanks.
TG
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bertilak
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by bertilak »

TheGiantess wrote: Sun Aug 07, 2022 2:58 pm Interesting article. Thanks for posting it. I understand what he is saying but I don't understand what we as long term investors are supposed to do about it. What do you think his advice is to someone saving for a 40 year retirement? Thanks.
TG
I agree. VERY interesting article.

I do think there is actionable information. Housel says:
  • ...diversified long-term investing is one of the most powerful understandings an investor
    can have. And one of the hardest things an investor can do is maintain conviction
    on a long-term strategy.
He also says:
  • ...maintain a level head through the inevitable chaos.
I think those are two Boglehead principles we are already familiar with:
  1. Buy the haystack.
  2. Stay the course.
Housel is confirming those by giving us an understanding of the underlying reasons.

A third Boglehead principle he does not address in this article:
  • 3. Cost matters.
Last edited by bertilak on Sun Aug 07, 2022 4:56 pm, edited 1 time in total.
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delamer
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by delamer »

TheGiantess wrote: Sun Aug 07, 2022 2:58 pm Interesting article. Thanks for posting it. I understand what he is saying but I don't understand what we as long term investors are supposed to do about it. What do you think his advice is to someone saving for a 40 year retirement? Thanks.
TG
Highly recommend his book “The Psychology of Money.”

For long-term investors, it’s fair to call him a Boglehead.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Pu239
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by Pu239 »

I wonder how well Housel's ideas apply to the Japanese real estate and stock bubbles.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot
minimalistmarc
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by minimalistmarc »

Pu239 wrote: Sun Aug 07, 2022 5:02 pm I wonder how well Housel's ideas apply to the Japanese real estate and stock bubbles.
I think they could be applied as you would have maintained a diversified portfolio and participated in the massive boom before the bust.
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nisiprius
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by nisiprius »

I'm missing the "strategy to protect yourself" part. Well, there's a sort of feeble strategy to protect yourself emotionally, but I was thinking more about protecting yourself financially.

He says the way you protect yourself is not to get emotional, Un the words of those old adventure games, "you must tell me how to do a thing like that."

He says you won't get emotional if you understand what's happening, and I have two problems with that. The first is that I don't know for sure if Morgan Housel (or Hyman Minsky) do understand why bubbles happen. Housel refers to Minsky's work as thes "financial instability hypothesis," which contains the word hypothesis, which is... hypothetical.

Maybe it's true. Maybe Mandelbrot's fractals and financial turbulence are true. Maybe Kondratiev waves and Fibonacci retraces are true. I don't think it's clear that anyone does know the "why."

The second problem is that in 2008-2009, I wasn't emotional because of failure to understand why the economy was crashing, I was emotional because of the severity of what was happening.

I am flummoxed by the weird precision of "Investing is seven parts emotional, three parts analytical."

The conclusion that he never seems to draw is that is that if bubbles and crashes are inevitable, then we should take them into account in gauging the risk of financial markets, and we should adjust our exposure accordingly. It's easy to talk about controlling your emotion, but that's sooner said than done. On the other hand, controlling your stock allocation is something anyone can do.

Housel's suggestions are already contained in the Bogleheads' investment philosophy, specifically "never try to time the market" and "stay the course." A point in the philosophy which he seems to miss is "never bear too much or too little risk."
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TheGiantess
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by TheGiantess »

Thank you for all of your replies. I guess when he writes that we need to "understand and invest with our own time horizon" he means our asset allocation stocks vs. Bonds and him writing about a stock being too expensive is mostly geared to individual stocks like his Yahoo example. I guess not too many short term/day trader people trade index funds short term? Or mutual funds in general?
TG
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by CyclingDuo »

delamer wrote: Sun Aug 07, 2022 4:53 pm
TheGiantess wrote: Sun Aug 07, 2022 2:58 pm Interesting article. Thanks for posting it. I understand what he is saying but I don't understand what we as long term investors are supposed to do about it. What do you think his advice is to someone saving for a 40 year retirement? Thanks.
TG
Highly recommend his book “The Psychology of Money.”
I will resoundingly second that!
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
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AnnetteLouisan
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by AnnetteLouisan »

Interesting article. Underscores the idea of investor heterogeneity that I believe is so important. We all have different goals, circumstances and time horizons.

Ps, some of my VTI is up $30/share since my June purchase at $181 and it’s very exciting!
Last edited by AnnetteLouisan on Wed Aug 10, 2022 8:47 pm, edited 2 times in total.
sc9182
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by sc9182 »

Is this article form 2017 - why wake-it-up now ?

Morgan is a good communicator - is he that good a investor ? (either personally or professionally)

Stay the course - keep investing - time/patience - and ensued compounding is your best friend
woodside
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by woodside »

It seemed that he was advocating buying the stock on the cheap after the bubble has burst. He was mentioning that the most critical time of the investment was right after the bubble burst (1999-2001, Sept 2008 to March 2009). If a person is 100% fully invested in stock, there is no money to buy on the cheap. This probably suggests at least 20% in bond and cash in AA during the regular time and then decreasing the bond/cash in the AA after the bubble has burst.

Say, always maintaining 80/20 (or 60/40) of stock/(bond or cash) in the AA during the regular time. After S&P 500 goes into the bear market (20% down from the peak), first change AA to 84/16 to buy some stock on the cheap, and then keep decreasing the bond/cash by 1% (or 2%) for each 5% further decrease of S&P 500.

After the S&P stepss out of the bear market (20% up from the bottom), then change the AA back to normal (80/20 or 60/40).

For the current bubble, we will start to buy Stock after the S&P goes into the bear market (somewhere around June) by changing the AA. For this year, since the bond also went down (though not as much down as stock), there was not much buying.

This requires some dancing by using the tax shelter accounts, otherwise, it will probably generate significant short-term tax gain. One needs to have very very strong confidence in the stock performance for the long term to be able to execute the plan that increases stock % while its price keeps going down.
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by bagastuff »

minimalistmarc wrote: Sun Aug 07, 2022 5:17 pm
Pu239 wrote: Sun Aug 07, 2022 5:02 pm I wonder how well Housel's ideas apply to the Japanese real estate and stock bubbles.
I think they could be applied as you would have maintained a diversified portfolio and participated in the massive boom before the bust.
and everything you bought right after the bust would be up mega by today
woodside
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by woodside »

The other thread viewtopic.php?p=6803369#p6803369 is quite relevant.
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Beensabu
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by Beensabu »

Boom
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term
to mostly short term.
TheGiantess wrote: Sun Aug 07, 2022 2:58 pm I understand what he is saying but I don't understand what we as long term investors are supposed to do about it.
Know what game you're playing and figure out what games other people are playing, just like he says. Don't play if it's not your game.
When momentum entices short-term investors, and short-term investors dominate market pricing and activity, the long-term investor is at risk of seeing rising prices as a signal of long-term worth.
He says to pay attention to volume and asset turnover to see if short-term investors have taken over as market movers. Or just look for kindly "now might be a good time to think about rebalancing, if you haven't for awhile" reminders from the forum. Don't get sucked into the FOMO, because the game short-term traders are playing is temporary and it will end. Don't anchor on portfolio balances or extrapolate recent rate of growth into the future during such a time.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
woodside
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Re: Morgan Housel - Bubbles and a Strategy to Protect Yourself

Post by woodside »

Loop back to this thread after I read his book "The Psychology of Money".

It seemed that he advocated continuing investing with the same plan (the usual motto of staying the course) regardless of market conditions, not what I initially thought to become more aggressive during the bear market and become more conservative during the bull market.
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