It’s so easy to get swept up in it.
Everyone’s making money. And fast…
You want to be a part of it, too.
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.
Good investing,
Vic Lederman
Further Reading
"Saying 'yes' to growing wealth means saying 'no' to mistakes, disasters, and losses," Dan Ferris writes. This mindset is crucial to preserving your investments during a mania. Learn more here: Essential Advice Nobody Else Will Give You.
Austin Root agrees that a piece of your portfolio should focus on investing in elite businesses for the long term. Find out why – and how you can recognize the most enduring companies – right here: This World-Class Business Is 'Built to Last.'
Meb Faber is a brilliant mind and a longtime friend of mine. He's the chief investment officer of Cambria Investments. And he recently created a one-click way to invest in two of my core investment criteria...
THE KING OF BIG TECH TRENDS IS STILL THRIVING
Today, we're looking at an Internet "World Dominator"...
Longtime DailyWealth readers know investing in "World Dominators" can be one of the safest strategies for long-term success. These companies usually are at the top of their industries... And they boast strong financials, powerful brands, and steady growth. Today, we're checking in on the parent company of one of the world's most well-known online tools...
Alphabet (GOOGL) is an $850 billion Internet giant. Best known for its Google search engine, Alphabet's products extend into cloud computing, software, and more. Its strong presence in so many areas has helped Alphabet become a dominant player in the tech space. And it gives GOOGL a long-term competitive advantage... Alphabet just reported second-quarter revenues of nearly $33 billion, a 26% increase from the same period last year.
As you can see in the chart below, shares of GOOGL just hit an all-time high. The stock has roughly doubled over the past three years. As long as Alphabet continues to lead the modern tech empire, expect this stock to continue moving higher...
