This time though from Jeremy Grantham...
"The average of all of the bubbles we have studied... is that they go up in three and a half years, and down in three... All of them go back to the original trend, the trend that was in place before the bubble formed...
Exhibit 5 shows six bubbles from 2000. You can see how perfect they are... My favorite is the Neuer Markt in Germany, which went up twelve times in three years, and lost every penny of it in two and a half years...
the U.S. housing bubble... One reason we were so impressed with it is that there had never been a housing bubble in American history... Previously, Chicago would boom, but Florida would bust. There was always enough diversification. It took Greenspan. It took zero interest rates. It took an amazing repackaging of mortgage instruments. It took people begging other people to take equity out of their houses to buy another one down in Florida...
Stock market sectors have also bubbled unfailingly – growth stocks, value stocks, Japanese growth stocks, etc... To ignore them, I believe, is to avoid one of the best, easiest ways of making money.
At Batterymarch we invested in small cap value in 1972-73 because we had created a chart of the ebb and flow of the relative performance of small cap that went back to 1925, and we could see this big cycle of small caps. We saw the same ebbing and flowing with value...
But we didn’t keep up with small cap value, and that has been a lesson that has echoed through my life: we hit the most mammoth of home runs, and yet couldn’t beat the small cap value benchmark. (One reason was that we were picking higher quality stocks – the real survivors. From its bottom in 1974, the index was supercharged by a small army of tiny stocks selling at, say, $1⅞ a share. These stocks, which were ticketed for bankruptcy if the world stayed bad for two more quarters, instead quadrupled in... six months... Picking the right sector was, in that case, more powerful than individual stock picking. Such themes are very, very hard to beat.
Let me end by emphasizing that responding to the ebbs and flows of major cycles and saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk... The really major bubbles will wash away big slices of even the best Graham and Dodd portfolios. Ignoring them is not a good idea."
"a generalized historical observation... at least one major bank – broadly defined – would fail,”... In previous banking crises, major banks had failed, and this crisis seemed likely, to us semi-pros, to be worse than most. So we studied in broad strokes previous crises and armchaired that we should up the ante. We got lucky in an area in which we were not real experts, and we know we were lucky...
We found 28 bubbles since 1920, defined arbitrarily but reasonably as two-standard-deviation events... All but one burst all the way back to the trend that existed prior to the start of the bubble... we had expected a fairly major overrun, which is historically common... a reasonably conservative investor looking at the data would want to allow for at least a 20% overrun"
"Bubbles bursting in major asset classes are... extremely dangerous and, ironically, they really are substantially controllable by the Fed... we will all have to deal with the consequences of an excessive number of major asset bubbles breaking... the two great economic setbacks of the 20th Century – the 1929-34 Depression and the rolling depression in Japan since 1989 – were both preceded by major asset bubbles and speculation... I believe that occasional financial crises are inevitable and that they are almost always preceded by extreme speculation
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