Investing

Like Moths to Flames

With each passing week, the conversation about stock market bubbles feels like it’s intensifying. I’m not really sure if that’s true but if feels like it. It actually just might be that a few people are becoming increasingly outspoken.

Naturally, the conversation has progressed to bubble talk as the stock market has continued to climb higher with investor euphoria growing along with it daily. None of this should be a surprise though. Overall, conditions are very accommodative right now and people are willing to chase prices higher.

The stock market is a major part of U.S. culture. In many ways, it’s become part of the American Dream. If given the opportunity, Americans will invest (or speculate), seeking to improve their respective financial situations. After all, as Americans we’ve done quite a bit of stock market and wealth accumulation romanticizing throughout our history. Whether it be popular movies portraying super successful investors and/or business people or get rich quick and easy fantasies we’ve all experienced at one point or another in our lives, investing and the prospect of making money are part of our cultural DNA.

It’s in these euphoric environments, that bubbles are formed and inflated. However as investors, we shouldn’t be afraid of bubbles. They’re a natural part of the investment eco-system and are impossible to avoid as long as human emotion is involved. Additionally, we have no idea how big a bubble will get or when it will pop. They can get bigger for longer than we usually imagine.

I’m not suggesting we are or aren’t in a bubble. It’s really besides the point because as investors we should accept bubbles as part of our overall experience in the markets and we shouldn’t change what we’re doing unless it’s reckless. With a good plan, discipline and the proper time horizon (i.e., long) we can handle bubbles. After all, it’s a lot of fun to be a part of an inflating bubble. It’s the popping of the bubbles and the aftermath that is most painful.