It’s so easy to get swept up in it.
Everyone’s making money. And fast…
That’s exactly what an asset bubble feels like.
It’s the “fast” part that should catch your attention. More specifically, it’s your time horizon… Are you suddenly looking for quick gains so you can join in the fun?
If you can recognize this is happening to you, then you can save yourself from inevitable losses with a simple principle…
Ask yourself this one-stop bubble-protection question:
“Has my time horizon changed from long to short?”
Morgan Housel of the Collaborative Fund explains this idea:
Money chases returns. 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.
Housel’s “The Reasonable Formation of Unreasonable Things” is featured in investment analyst Meb Faber’s newest book The Best Investment Writing, Vol. 2. This little piece of wisdom alone will help keep you wealthy when the next bubble bursts.
Housel’s point is simple. Bubbles shift investors’ focus from the long term to the short.
When that happens, rapidly rising prices make stupid-high valuations seem reasonable. The appeal of fast money encourages investors to overpay.
This is the key point. Short-term traders don’t worry about the value of something. They’re looking at the price action. But most of us are investors, not traders.
This makes the bubble scenario especially risky. When long-term investors like you and me start acting like traders, we can get drawn into a game we’re destined to lose.
You don’t have to participate.
Ask yourself, “Has my time horizon changed from long to short?” If the answer is yes, you’re probably taking on more risk than you should.
Why is that? Housel puts it like this…
Bubbles do damage when long-term investors mistakenly take their cues from short-term traders…
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.
That’s just a fancy way of saying an asset that’s trading up is not the same as an asset that’s valuable. Fast-moving prices confuse long-term investors.
They see a short-term trading vehicle going up… And they think it’s valuable. It’s not.
Fast-moving prices and short-term trades are speculations. Not investments.
That doesn’t mean you can’t get in on the action. But remember, if your time horizon has shifted from long term to short term, you could be taking on more risk. Usually a lot more.
Meb Faber of Cambria Investments specifically chose Housel’s advice for his new book, The Best Investment Writing, Volume 2. In it, he collects the best contemporary work from the sharpest minds in finance.
The writing flows easily between the dense mechanics of modern investing… and the kind of common-sense wisdom we’re sharing today.
I’m comfortable saying that you will find something in it that will make you a better, more thoughtful investor.
So, if you’re looking for the most important insights from the brightest minds in the investing world, then check out The Best Investment Writing, Volume 2. You can preorder it from Amazon right here. (Meb also offers several of his other books for free online – make sure to check them out right here.)
In short, if you’re making short-term speculations on fast-moving assets… allocate wisely. Don’t dump your savings into a short-term “sure deal.” Not unless you’re willing to lose it all.
Bill Bonner went to law school with Fed Chair Jerome Powell... Co-authored 3 New York Times Best-sellers... And is one of America's most successful entrepreneurs. Bonner's made 3 big macro-economic predictions in his 40-year career, all of which came true. Now he's issuing his 4th and Final Warning. 2023 could be a difficult year for you and your money. See Bonner's warning and 4 recommended steps here...
Source: Daily Wealth