In his weekend column for the Financial Times, John Authers made some timely observations surrounding booms and bubbles. As the Dow and other indices march ever onward and mostly upward, the gloom and doom crowd grows ever louder – predicting how steep the next decline will be. Authers’ comments include results of a study performed by Yale University’s Will Goetzmann and Edwin Beinecke.
They concluded that:
“Bubbles are booms gone bad – but not all booms are bad.”
The numbers support their conclusions. Of 72 cases where a market doubled within a year, in the following year 6 doubled again and 3 halved. In cases where the market doubled in three years, only 10.4 percent of them had halved in the next five years. Hardly the case for every boom being a looming disaster. Irrational behavior is often the culprit when bubbles burst, but bubbles begin as booms originating from some fundamental and rational reasoning. Booms are not born out of stupidity. New highs in the indices will create the “wall of worry” that all investors climb. If investors choose not to participate in what they perceive as a boom, soon to be bubble, then they’ll have no cushion to absorb those outsized losses when the bubble gets pricked. Being invested during times when outsized gains are being generated magnifies the compounding effect tremendously and is critical to minimizing the effect of losses. Finding the right money management discipline is also important for managing market volatility. Emotional temptations that occur during market highs and market lows need to be controlled with rational thinking and then rational actions.
Salt Creek is approaching the one year mark and we’re pleased with the results of our efforts and with the support you’ve given us. As our technology continues to be more accretive to your efforts, we expect these tools to produce better measures of productivity to Salt Creek as well as our advisors and their clients. New enhancements to the platform will soon be coming and we’re excited about what the results will be.