Investing in a Bubble

By Ahmed Elbakari, Tom Macky, and Igor Vasilachi of VERDAD

Spotting Bubbles is Easier than Investing through Them
The S&P 500 index soared 38% in 1995. This sharp increase, following four years of steady gains, made some of the smartest investors on Wall Street begin to grow wary of a bubble in the making.

Over the past few months, we studied what today’s most famous investors were saying during the years leading up to the dot-com bubble. We referred to investors’ letters to shareholders, online databases such as LexisNexis, and business books to collect their quotes, building a database of every piece of macro commentary we could find. We found that the investors we studied almost all perceived the market to be in a bubble, but almost all of them were too early in making the call. It’s easier to predict what will happen, it turns out, than when it will happen.

“I think we’re approaching a blow-off phase of the U.S. stock market,” Ray Dalio told Pension & Investments in 1995. “Price acceleration on the upside is preceding a significant correction—20% beginning over the next 18 months.” Peter Lynch echoed Dalio’s concerns in an article in Worth Magazine in 1995, warning that “not enough investors are worried.”

It didn’t take long for more of the world’s top investors to start….. Read more