Is it or is it not a bubble?

Two very thoughtful pieces, Mr. Authers – on Feb. 11 and Feb. 25, on the bubbles that did not burst and on market timing. These issues will be debated ad nauseam and ad infinitum without any definite answers. It is clear that there is benefit of hindsight in studies that indicate that market timing works. Or, alternatively, studies that debunk market timing also do so with the benefit of hindsight.

Clearly, if ‘BUY and HOLD’ works better than timing, the question always arises as to when does one BUY. It is not at the beginning of time or when stock markets came into existence.

If it is accepted that people BUY at a high, then clearly, BUY and HOLD does not really help. Does it? If one bought in April 2000, in nominal terms, it took 13 years to breakeven in nominal terms for S&P 500 index and even longer for Nasdaq Composite. Similar is the case for buyers in 1929 (much longer than it took for a buyer in April 2000) and in 1967.

Agreed that it is very difficult for someone to be a good seller at the top and a good buyer at the bottom. Most things in life are asymmetric. Investment discipline might also be subject to the law of asymmetry.

However, if discipline allowed investors to spot exuberance and exit, then the same discipline should alert them to spot overwhelming pessimism and enter. Easier said than done, of course.

But, the point remains that since we do not know when to BUY, there ought to be better strategies than BUY and HOLD. Strategies such as constant rebalancing or rule-bound investing (sell at 2 S.D above mean valuation – whatever one’s favourite metric and buy at 2 S.D below that) applied consistently without human intervention should work better than BUY and HOLD.

If market timing does not work in practice, BUY and HOLD does not either.


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