Tuesday, July 4, 2017

The Delusional Positioning of A Bubble Forming

A bubble formation is technically speaking a concept in the market where more and more people are entering and participating in a phenomenon that gets bigger.

It started all the way from the first few batches that enter into the phenomenon and made extraordinary gains from sitting in a pot of gold, then made into the headline news in the media so more people can join in the party. This phenomenon made such a huge amount of gains in a short amount of time such that it will look stupid on people who doesn't participate in it.

Everyone congratulates one another and that's when the "wealth effect" starts coming in, a concept which my fellow blogger STE just wrote it here. Essentially, it is a prelude that when the value of the assets you are holding increases in price and you are sitting on a comfortable gains, this security about wealth is being translated into spending higher because earning money is that... simple.

Charles Mackay, one of the famous journalist who wrote on the book "Extraordinary Popular Delusions and The Madness of Crowds" states that bubble spotting isn't as simple as it appears. As investors, you should always guard against the popular assertions made by high profile analysts or pundits that claim they can detect bubbles and exit before the bubble bursts.

Take a look from one of the excerpts from the everly popular figure Jim Rogers on his claims on the market each year.

The point he is making might be right in theory but for as long as the bubble is still forming and the party still lasts, it will live to see another day.

We've seen the US market expanding for 9 consecutive years since the great financial crisis and valuations are within top 3 highest since the Great Depression in 1929. We've also seen byptocurrency like Bitcoin and Etherium gaining exponentially upwards since the last couple of years. The delusional positioning in this instance is to avoid totally and wait for the crash to happen or participate in the momentum and make your way out before the party is over.

There isn't a definite answer to this and only with hindsight we can tell our children how easy it is to predict and see that happening.

The great value investor Benjamin Graham once mentioned that investors should always look to portfolio balancing as a measure to his or her own psychological play on the market. He added that investors should never have less than 25% or more than 75% of their money in an equity market. The room for that error of +-25% top and bottom is to account for the investor's own judgement when the market level has become increasingly dangerous or opportunist. But because no one can ever predict anything so accurately, you shouldn't go one extreme and do a 100% or 0% binomial decision.

Now, as investors, have you worked out a perfect plan for yourself?

Thanks for reading.

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  1. I have more than 75% invested currently, have about 20k free, but about 395k invested and I am happy if the market moves in either direction. I stay with the dividend growth formula for the most part and feel like a dip would allow me to buy more at a reduced cost basis. I am more of a buy and hold person and focus on what the dividends are doing and how much they increase year over year. I completely agree with your article though and think that for the typical investor it makes 100% complete sense.

    1. Hi Duncan

      I am with you on this because I like to get majority invested but leave a room for opportunity to take place too. Either way it goes we will come out a winner in the long term.

  2. I saw you post this article, then you made a divestment. Is it related?

    At the beginning of the year, I was cash broke as I was completely sold out my portfolio to buy the commercial property. Now, I had some money saved up, I'm still "lowly" buying as many analysts are expecting a correction since 2013 hahah! LOL :)

    I'm okay with the cash on hand now, as I'm expecting to pay $20K plus in business taxes for this year. We'll see, as this is my first year, I don't want to get blindsighted for a huge taxes bill.

    I also want to build up my savings, so unless, something happen in the market, I'll keep saving until it hit $50K or so... maybe 6momths emergency funds.

    1. Hi Vivianne

      Wow your business taxes are huge there!

      The commercial complex youve been buying are paying off and you just have to do this over and over again to build this up.

      Great strategy there.

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