BLOG: Bubble or not? It doesn’t matter
It is true that many financial markets have undergone significant growth in recent years, and many are quite richly valued. However, as to whether any of these markets constitute a ‘bubble’ could hardly be less relevant.
Knowing whether a market is in a bubble or not does not give you any extra ability when it comes to market timing. Bear markets are a natural feature of the investment landscape, and the risk of a market going into one is always there, irrespective of whether that market has been deemed a ‘bubble’. Therefore, even if you concluded that the current market conditions are not bubble-like, this does not prevent you from potentially losing a lot of money!
Equally, excessive valuations can persist for far longer than one might imagine. So, even a market in a bubble can move a lot higher, and opportunities still exist to make further returns.
A bull market is more likely to end on deteriorating fundamentals (such as declining return on equity or profit margins) than on high prices (which can always go even higher). The depth of any subsequent market fall can however bear relation to whatever the market was originally valued at, so the scale of potential future gain or loss should be factored into your thinking.
The bottom line is that those seeking to declare a bubble, or otherwise, are simply another species of investors who think they can accurately time the market, and with an equally poor track record. As Howard Marks put it: “There can be more risk in thinking that you know something, than in accepting that you don’t¹.”
Fortunately you don’t need to get involved in this guessing game, as a properly diversified and risk controlled portfolio should be for “all seasons”, and can instead look to take advantage of market turbulence, as and when it arrives.
Who knows if we are in a bubble. That is not the point, it doesn’t matter – investors and media are hyper-ventilating over a measure that has no informational value.
¹ Howard Marks, ‘The Most Important Thing’ (2011)
Andrew Wilson is head of investment at Towry