This isn’t investment advice, but for the hundred millionth time: You don’t short bubbles, you buy into them, with leverage if you know how, and pray you’re not late getting out.
Every professional investor knows that explicitly. Every retail investor knows it too, at least intuitively. It’s how a lot (maybe even most) huge fortunes amassed in markets were made.
If you see someone on the internet suggesting you should short an ostensible bubble, it’s a good bet that person either has no money to speak of or else made the money they do have peddling bear narratives, or working some manner of mundane day job, not trading.
The number of people who made a fortune shorting bubbles is smaller than the number of new friends I’ve made over the last 20 years. So, vanishingly few.
If all of that’s written in 14-point font, the asterisk that comes afterwards is typed in 80-point font, and the footnote the asterisk refers to is bolded and italicized. It reads as follows:
Buying into bubbles is very likely to mean buying assets at inflated valuations. Over long investment horizons, starting valuation is pretty much the only thing that matters. So in addition to the self-evident risk that buying into a bubble exposes you to enormous near-term losses in the event the bubble bursts (and ruinous losses in the event you employed too much leverage), it also stacks the deck against you on those investments over the long-term relative to investments made when valuations were cheaper.
That’s a helluva disclaimer, but… well, have you ever the read the disclaimers on the side of, say, an Advil bottle? If not, and that sort of thing scares you, don’t. Because the left-tail scenario on a couple of Advil tablets is far, far worse than the left-tail scenario on buying equities trading on nosebleed multiples.
With that in mind, the October vintage of BofA’s monthly fund manager survey revealed what finance-focused social media was keen on Tuesday to lampoon as a ridiculous contradiction: One one hand, pros are bullish with relatively high equity allocations, but on the other, a majority’s convinced that equities are trading too rich.
The figure on the left, below, is familiar to the extent it looks almost exactly like the same figure from last month’s poll. 60% of survey respondents said global stocks are overvalued this month, up from 58% in September and a new record.
The figure on the right shows a very large month-to-month increase in the share who said AI’s a bubble.
Given that, the pros should be selling stocks, right? Wrong. No. Particularly not given that, as the survey also showed, a net 59% viewed current liquidity conditions as positive, the most since September of 2021.
Again: You want to be long bubbles, not short them because the odds of additional gains are much higher at any given time than the odds that you’ll be able to pinpoint the exact moment when the bubble bursts.
The juxtaposition shown below is another way to illustrate the supposed “disparity” between bubble worries and stock-buying.
The figure on the left shows the equity Overweight net of cash at 45%, the highest since January. The chart on the right shows a third of investors view a burst AI equity bubble as the biggest tail risk, marking the first time that threat took the number one spot.
I’ll be the first person to tell you that “professional” investors can be a contrarian indicator, and I’ve never been shy about having fun at the expense of the active management crowd, nor about being outright derisive towards the 2 and 20 set.
But if the question’s whether it’s nonsensical that people who allocate capital for a living are buying into assets they readily admit are overvalued and might even constitute a bubble, the answer’s “no.” Particularly not when you consider it’s not their money that’s on the line, but rather other people’s.
Does that mean you should buy the S&P trading at 23 times earnings estimates which might turn out to be too optimistic? Well, no. Not necessarily. It just means you probably shouldn’t short it either, because the fact that the forward multiple made it all the way to 23x is itself a testament to the power of the narrative inflating the bubble.
Julian Robertson would concur – RIP
“But if the question’s whether it’s nonsensical that people who allocate capital for a living are buying into assets they readily admit are overvalued and might even constitute a bubble, the answer’s “no.” Particularly not when you consider it’s not their money that’s on the line, but rather other people’s.”
These days you could rewrite this to say “But if the question’s whether it’s nonsensical that people who run large companies for a living are buying into assets they readily admit are overvalued and might even constitute a bubble, the answer’s “no.” Particularly not when you consider it’s not their money that’s on the line, but rather their shareholders.” It’s almost funny how it is shrugged off when execs at those firms explicitly say as much.
Poor Bill Lerach died before the greatest payday of his lifetime.
Everyone is caught in some version of a prisoner’s dilemma.
The contrarian investors are just more tolerant of gruel and beatings, or some of them are masochists and enjoy it.
The contrarian CEOs . . . can you imagine any of the big techs publicly ceding the AI race? How long would their CEOs, or their personal wealth, last? Tim Cook has gotten some slack, given Apple’s business model, but how much?
I gave that a moment’s thought before hitting send on that post. Then I remembered that we are talking about shareholder capitalism. Not partnerships. After we enjoyed the GFC a few grumbling old-timers questioned if it would have happened back when the Wall Street firms were partnerships, with the partners own money at risk?
Geez JL, we’re talking about modern business here. Those poor CEOs are more than well protected by golden parachutes. Some of which are explicitly or implicitly backstopped by taxpayers.
Shorting in general is a mug’s game. For most ordinary investors, you’re better off scouting for opportunities on the long side, and you’re less likely to blow up that way too.
“well, have you ever the read the disclaimers on the side of, say, an Advil bottle? If not, and that sort of thing scares you, don’t”
These are amazing little gems in your writing, and Yes, I am scared!!
But I am even more scared about the “left-tail” scenario of using highly processed cooking oil. RFK isn’t wrong on this one.
Now that I’m over 80, have narrowly recovered from three close calls with death, and am still chugging along, I fear nothing really. RFK Jr doesn’t actually know anything, btw. I eat what I want, sleep when I want, do nothing when I want. I avoid the HC system as much as I can. I try like hell to avoid stupidity, and stupid people. That alone keeps me busy. I have no bucket list, few friends, many relatives I’ve never actually met. Still, I’ve done what I set out to do, help as many people as I could and chill to the maximum otherwise.
Honestly curious – if you eschew processed cooking oils, which do you use? Long ago I eschewed margarine and went back to butter. But I’d find it difficult to give up olive and canola oil in favor of lard, though lard it is way better for pie crusts, doughnuts and French fries.
Then there are those pesky vegans to contend with …
The ban is on “used cooking oils.”
Non-fat is out (it really doesn’t save you from elevated LDL’s); Olive oil is the healthiest, lard not so much, and used cooking oils, well….yum.
BTW Jan-Aug 2025 UCO imports from China were down to $286 million. China must be cowering…
Next market dip, I am going to dip my toe into and out from SPXL….This is absolutely a signal that the bubble is about ready to burst. 🙂
This record number shows just how aggressively retail traders bought the dip on Friday
Citadel data shows amateur traders bought far more bullish call options than professional money managers
https://www.marketwatch.com/story/this-record-number-shows-just-how-aggressively-retail-traders-bought-the-dip-on-friday-f64c5f79
It would appear that investor’s already have been buying into this one. https://www.finra.org/rules-guidance/key-topics/margin-accounts/margin-statistics
Record high margin debt ($1.13T) doesn’t leave me at ease.