Professor Bubble

Discussion in 'Economics' started by omcate, Oct 24, 2003.

  1. omcate



    Do you agree with this guy's comments about the stock market ?


    Now an economics professor at George Mason University in Virginia, Smith is watching the market climb again. But he's not watching warily because he doesn't believe that another crash is imminent. By his reckoning, the memories of the 2000 debacle are too fresh for investors to spin out of control this time. "New bubble danger comes down the road when a new generation of investors joins the market," Smith says.

    Once burned, twice shy, investors behave in predictable ways, Smith discovered through his trading simulations. Charting the ebb and flow of trading on the New York Stock Exchange floor would be an impossible experiment, so Smith set up his own market in a lab. Using the discipline he founded, called experimental economics, he lately is trying to figure out how best to trade electrical power and airport landing slots.

    Smith's benign take on today's stock market is a comfort to those who fear that a new spell of irrational exuberance is upon us. The concern is understandable. The S&P 500 is up 29% over the last 12 months since the bear market hit its bottom. That has brought the price of the index to 30 times trailing earnings, double the historical norm.

    Regardless, Smith points out that market double dips don't occur in rapid sequence. Indeed, since 1926 the space between down years for the broad market has always been at least two years, and usually much longer, according to Ibbotson Associates data. The closest sequence in the recent past was the two positive years between the 1973-74 bear market and the 7% downturn in 1977. Next came three up years before the 5% slump in 1981, followed by eight good years until 1990's 3% drop and then nine positive years until the 2000-02 wipeout. And while the current market P/E is surely high by historical standards, at least it's considerably down from its level at the last bear market's apogee, 46.

    Smith says, the Internet and computers are here to stay, helping drive U.S. productivity gains. And the excesses of high tech's early days have been thankfully driven out, leaving the strong. The kind of companies that cause bubbles were removed from the market.

    :p :p :p
  2. maxpi


  3. Never trust anyone who says "trust me" or whose name appears to be Smith.

    Aside from that, am I the only one who thinks that bubbles are often followed by a second bubble a few years later, and it is not too unlikely that the second bubble will be bigger than the first one? I have been saying this for a year now, actually it must be more than that, because I remember the day the market bottomed in the summer of 2002 (when Maria Bartiromo said we should all start shorting stocks), and I was thinking about how cool it would be to buy NQ that day and sell it on the height of the second bubble. At that time, I was not ready for such a move, so I wrote blue chip puts instead, which turned out to be an OK decision given the fact that we took out those lows later that year.

    Anyway, EVERYONE is thinking that there won't be another bubble. Of course, everyone is thinking that everyone is thinking that there won't be another bubble. But then again, everyone is thinking that everyone is thinking that everyone is thinking ... This is exactly the same fundamental phenomenon that determines prices in any market at any given time. Of course you want to buy when everyone thinks the stock will go down, but you don't want to buy when everyone thinks that everyone thinks that the stock will go down and hence is looking to buy, but you wouldn't mind buying when everyone is thinking that everyone is thinking that everyone is thinking ... Bubbles and scalping are not very different from the psychological point of view. There is always the other side of the coin, and everything has always been discounted, with a few exceptions. Those who have a feel for these exceptions will trade well. And those who have no clue will publish articles like Mr. Smith or write posts like this one.
  4. Mecro


    Great post.
  5. omcate


    It is one of the reasons that trading is so difficult. No one can really predict the movements of the stock market. In the winter of 1999, I walked along the sea shore near Battery Park with a friend. He told me that the baby boomers would keep on pumping money into the stock market, and continue to push it up for the next decade. We all know what happens in spring 2000.:D One year ago, he talked with some experts at Lehman Brothers whom he respected. Then, he told me that the stock market would crash big. We all know what happens to the stock market in the past 12 months.:p
  6. we are all trying to learn here. My first impression on reading the article posted by Omcate was to think of Poisson Processes.

    I'd rather not describe these. However, just look at the way the professor describes his data in paragraph 4 and then think about how a Poisson Process works and you have a clue to how to go about answering Omcate's question.

    I may be completely wrong, but don't want to seem as if I, for one, haven't given his question some thought.

    Hope you all have a fun and rewarding weekend.
  7. Cutten


    Can anyone say "data-mining"?

    Japan had 3 down years from 1996-1998, then an up year in 1999 followed immediately by a down year in 2000, another in 2001, and yet another in 2002. It then went even lower in 2003 before finally bottoming. But according to our Professor Smith, market double dips don't occur in rapid sequence, because the memory is too fresh? What planet is this guy on?

    If you had bought at the close of 1999 as recommended by Prof Smith (at 18934 in the Nikkei), then 4 years later you would be down to only 56.5% of your original trading capital, and would at one point have been down to 40% of capital.

    So that's one counterexample from only the last 4 years. Basically Prof Smith is asking you to risk at least 60% of your net worth on a bet that his study is correct.

    This kind of crap is typical of people who have never done any trading in the real world.
  8. Cutten


    Can you tell us when your friend next gets bullish on stocks please? A person who is always wrong is just as valuable as someone who is always right.
  9. omcate


    Now that I have found the Holy Grail, you seriously think that I'll share the info with you.

    :p :p :p
    :D :D :D
  10. Well, that takes a load off my mind.
    #10     Oct 30, 2003