BULL MARKETS & BUBBLES

“When prices go up enough, everybody believes something, even if it is only that everybody else is just about to believe.” Adam Smith, The Money Game

“If it trades like a bull market, it’s a bull market.” Colm O’Shea

“Bull markets ignore bad news, and any good news is reason for a further rally.” Michael Platt

"Bull markets can obscure mathematical laws, but they cannot repeal them." Warren Buffett

“Gresham’s Law says that the bad money [paper] drives the good money [specie] out of circulation; this accurately describes human behaviour when people are confronted with a cost-free choice. I now believe this accurately describes people’s choice of investment philosophies, especially late in a bull market, when the sloppy analysis drives out the disciplined assessment, and when the grab for return overwhelms the desire for capital preservation.” Seth Klarman

“The longer the bull market lasts the more severely investors will be affected with amnesia; after five years or so, many people no longer believe that bear markets are possible.” Benjamin Graham

“In investor behaviour, particularly during the last stages of a great bull market, perception of risk and actual risk are at opposite ends of the spectrum.” Leon Levy

"People tend to forget about the importance of the price they pay as the experience of a bull market just sort of dulls the senses generally." Charlie Munger

"Scarce to begin with, sober reflection gets even scarcer as bull markets progress." John Neff

“After a bull market that goes on for years, who is managing most of the money? The bears are all unemployed; they’re not managing any money at all. You have a few very flexible smart people, but they run relatively small amounts of money, so they don’t matter either. The managers who are relentlessly bullish and who buy more every time the market goes down will be the ones who end up managing most of the money. So, you shouldn’t expect a big bull market to end in any rational fashion.” Colm O’Shea

“The longer a benign circle lasts the more attractive it is to hold financial assets. Those who are inclined to fight the trend are progressively eliminated and in the end only trend followers survive as active participants. As speculation gains in importance, other factors lose their influence. There is nothing to guide speculators but the market itself, and the market is dominated by trend followers. When a change in trend is recognised, the volume of speculative transactions is likely to undergo a dramatic, not to say catastrophic, increase. While a trend persists, speculative flows are incremental, but a reversal involves not only the current flow but also the accumulated stock of speculative capital. The longer the trend has persisted, the larger the accumulation.” George Soros

“Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these ‘investors’ learn that when the bell rings - in this case, the one that opens the New York Stock Exchange at 9:30 a.m. - they get fed. Through this daily reinforcement, they become convinced that there is a God and that he wants them to get rich.” Warren Buffett

"The further you get away from a bear market, the greater the number of people who have convinced themselves they can handle the downside – until the next time, of course. In the interim, if the indices are performing well, then you can bet that many investors – individuals and professionals, alike – are going to feel pressure to do whatever they can to ride the bull." Steven Romick

"The fraud cycle follows the financial and business cycle with a lag. And that is as bull markets go on, people’s sense of disbelief is reduced and they begin to believe things that are too good to be true. It’s human nature. And bad people take advantage of that." Jim Chanos

“Never confuse genius with luck and a bull market.” John Bogle

"I mean, you know, bull markets make a lot of people very smart." Ed Yardeni

"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond." Warren Buffett

"In a bull market, it is advisable to restrain one's greed. There is an old wall street saying, ‘The bulls make money, the bears make money. But what happens to the pigs?’. You can't make 101 percent. You shouldn't even strive to make 100 percent. Your goal should be 66.6% of a big move. Get out and then reinvest in something that has been newly studied." Roy Neuberger

“When an epidemic of high-turnover speculation has displaced long-term investment as the standard conduct in the financial markets, the endgame is always never pleasant.” Frank Martin

"I have lived through or studied hundreds, possibly even thousands of bull and bear markets. In every bull market, whether it is IBM or oats, the bulls always seem to come up with reasons it must go on, and on and on. I remember hearing hundreds of times ‘We are going to run out of supply’. ‘This time is going to be different’, ‘Oil has to sell at $100 a barrell.’ ‘Oil is not a commodity’ [he laughs]. ‘Gold is different from every other commodity’. Well, damn, for 5,000 years it has not been different from every other commodity." Jim Rogers

“Markets may initially trend for fundamental reasons, but prices overshoot by ludicrous amounts. At some point, prices go up today simply because they went up yesterday.” Michael Platt

“It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, where the mania runs wild and prices go parabolic.” Paul Tudor Jones

"Whenever there is a bull market, people become hysterical after a few years. They think, 'Gosh, what has happened for the past five years is going to go on forever'." Jim Rogers

“There’s no question that rising prices create their own excitement. So when people see gold go up a lot — I mean, if your neighbor owns some gold, and you think you’re smarter than he is, and you didn’t own any, and your wife says to you, you know, ‘How come that jerk next door is making money, you know, and you’re just sitting here?’ It can start affecting behavior. And people like to get in on things that have been rising in price and all of that. But over time, that has not been the way to get rich.” Warren Buffett

"Bull markets and bear markets last long enough so that the average trader is likely to forget by the time the climax is approaching that any other sort of movement is possible." Philip Carret

"What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can’t outperform businesses indefinitely." Warren Buffett

"Common stocks should be purchased when their prices are low, not after they have risen to high levels during an upward bull-market spiral. Buy when everyone else is selling and hold on until everyone else is buying — this is more than just a catchy slogan. It is the very essence of successful investment." J Paul Getty

"Bulls will patiently explain that "it is different this time" .. Of course, any contrarian knows that just as a grim present is usually a precursor to a better future, a rosy present may be a precursor to a bleaker tomorrow." Seth Klarman

"During 'bull' markets, many investors tend to give themselves too much credit for favourable results and to give insufficient credit to the positive environment that played a large role in creating the results. This can lead to overconfidence on the part of the investor and resulting mis-assessment of risks." Ed Wachenheim

"Very early in my career, a veteran investor told me about the three stages of a bull market. Now I'll share them with you. The first, when a few forward-looking people begin to believe things will get better. The second, when most investors realize improvement is actually taking place. The third, when everyone concludes things will get better forever. Why would anyone waste time trying for a better description? This one says it all. It's essential that we grasp its significance." Howard Marks

“As a runaway bull market persists, its relentless vacuum cleaner eventually sucks everyone in. Investors who are skeptical about the perceived overvaluation are forced to watch as their career prospects melt down and security prices melt up. New rationalizations, disguised as rationales, enter the higher levels of discourse to justify jumping, or creeping, onto the asset-price train despite disdaining it when it was dozens of percentage points lower. A feeling of fear and acrophobia then becomes replaced by the giddy and disorienting feeling of finally being on track to make money along with the crowd and not feeling isolated in Cranky Valueland.” Paul Singer

“In the last stages of a bull market when you have a lot of people making lots of money on all sorts of things that are not within your circle of competence – you must be rational to accept that others are making money in things that are not for you. You must react with equanimity about that and not be affected by the fact that other people are making money and you are not making money in whatever situation. It takes a lot of rationality to do that. It’s not that easy to do when those other people make money – when they make what looks like easy money – on things you believe are not good investments.” Francois Rochon

“Market extremes represent inflection points. These occur when bullishness or bearishness reaches a maximum. Figuratively speaking, a top occurs when the last person who will become a buyer does so. Since every buyer has joined the bullish herd by the time the top is reached, bullishness can go no further, and the market is as high as it can go. Buying or holding is dangerous. Since there’s no one left to turn bullish, the market stops going up. And if the next day one person switches from buyer to seller, it will start to go down.” Howard Marks

BUBBLES

“Understanding the pathology of bubbles is not unimportant.” Warren Buffett, USA Financial Crisis Inquiry Commission Interview

“A bubble connotes unreasonably optimistic psychology and a belief there is no price too high for the bubble asset.” Howard Marks

“When prices go up enough, everybody believes something, even if it is only that everybody else is just about to believe.” Adam Smith, The Money Game

“It helps to be outside the bubble to see the bubble.” Nick Sleep

“One man’s bubble is another man’s growth stock.” Murray Stahl

“At the root of all financial bubbles is a good idea carried to excess.” Seth Klarman

"Logical-seeming rationales play a part in most bull markets... All bubbles start with a modicum of truth." Howard Marks

“Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend.” George Soros

"The only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise and - it's quite interesting how that develops - originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action." Warren Buffett

“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception." George Soros

“In simple terms, financial bubbles, driven as they are by human folly, are often the result of too much money chasing too few worthy ideas, leading to over-investment and excess supply.” Frank Martin

“It’s an oversimplification – but not a grievous one – to say the inevitable hallmark of bubbles is a dearth of risk aversion.” Howard Marks

"I would be reluctant to think that men will ever be smart and far-sighted enough to avoid the next bubble unless man's basic greed can be excised. We know wars are not good, but they seem to be a permanent staple of humanity. Why not bubbles?" Paul Tudor Jones

“A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street (a community in which quality control is not prized) will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.” Warren Buffett

"A good working knowledge of the history of bubbles can also help preserve your capital." James Montier

“The psychology that allows bubbles to form always break, sometimes on a dime.” Seth Klarman

“To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negative to be ignored. Doing these things isn’t easy, and thus few people are able to abstain.” Howard Marks

“The euphoria in human nature takes over when the economy is expanding for several years, leading to bubbles, and these bubbles cannot be defused until the fever breaks.” Frank Martin

“What matters in a bubble is market psychology, not valuation. Valuation is irrelevant; that’s what makes it a bubble. On March 10, 2000, nobody knew that it was the top. Even by September 2000, it wasn’t clear. There was no obvious event that marked the top. Only in hindsight do people try to back fit an explanation. Bubbles tend to topple under their own weight. Everybody is in. The last short has covered. The last buyer has bought (or bought massive amounts of weekly calls). The decline starts and the psychology shifts from greed to complacency to worry to panic.” David Einhorn

“Bubbles blown large enough inevitably pop. And then the old proverb is confimed once again: ‘What the wise man does in the beginning, the fool does in the end.’” Warren Buffett

"When people live in a balloon, they tend to shy away from the guy holding the needle." Sam Zell

"There are two cornerstones to a bubble. The first is price momentum; the second, wide discrepancy between price and value." Marathon Asset Management

"This is what happens in manias - people wilfully forget inconvenient facts like arithmetic." Scott Fearon

“When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational." George Soros

"I don’t ever want to profit from a bubble. Soros does that, that is just not my game. I don’t profess any ability to understand how long a crowd will buy into a bubble. I invest in things that appear to be compelling values that continues." Li Lu

"From painful past experience I have learned that bubbles can get bigger and last longer than I can imagine." Barton Biggs

"I know that bubbles have always happened and they always look the same, it is the damnedest thing. People always say the same things in bubbles: "This new technology is going to change the world," or "You don't understand what is going on, you old fogey." All those same things have been trotted out in every bubble in history, whether it is commodities, tankers or bonds. People always get just as hysterical. The smart money always loses money shorting them because they cannot comprehend that it could go as high as it does." Jim Rogers

"A bubble can be identified partly based on nosebleed valuations, but a bubble is also behavioural. When prices are rising simply because they have been rising, when people on the sidelines are drawn into speculation because they can't stand their friends and neighbours making what seems like free money while they themselves are not, the market maybe entering bubble territory. In the words of famed economist John Kenneth Galbraith, ‘A bubble comes from rising prices, whether of stocks, real estate, works of art or anything else. A price increase attracts attention and buyers, which results in even higher prices.’" Seth Klarman

"What I've learned is that bubbles last a long time, and that there's money to be made out of bubbles. The main thing about bubbles is that you need to be early. The worst thing you can do is to be stubborn and then late to convert." Colm O'Shea

"It's excruciatingly difficult to figure out when bubbles are going to burst. They have a nasty tendency to last much longer than even the most experienced, patient student of financial markets and crowd psychology can believe. Bubbles always flow from powerful substance so it's the rational being taken to the irrational to the mystic. Valuation and overbought technical metrics invariably signal the bust far too early." Barton Biggs

"All bubbles result from megatrends and the excess focus on the demand side of the equation, with little reference to management quality and the supply side, is usually the great error made by investors." Marathon Asset Management

"The belief that some fundamental limiter is no longer valid - and thus historic notions of fair value no longer matter - is invariably at the core of every bubble and consequent crash." Howard Marks

"Giant bubbles are easy to spot statistically but hard to call from a career risk perspective. It is easy to be early, and being early may lose you your job, your clients, and your credibility. Every major bull event is called a paradigm shift but they almost never exist. Almost never. But not never, ever. In 1999 we presented 28 major bubbles of the past and were able to call the score: Mean Reversion, 28; Paradigm Shift, Nil!" Jeremy Grantham

“It’s always hard to know when you are in a bubble, and if you are in a bubble, when it is going to pop. It’s a lot like the chaos theory image of dripping sand onto a little pile that’s shaped like a cone on the beach. The pile gets higher and higher and finally suddenly there will be a little avalanche. The same thing with real avalanches in the snow, it piles up and you never know quite when its going to go but that if it keep piling up something will trigger it and you will have a disaster of some kind.” Ed Thorp

"In many ways, mania participants suffer from acute cases of historical myopia. They only look as far back as the first days of their particular bubble and assume the older ways of living or doing business have now been rendered permanently obsolete." Scott Fearon

"When an asset class is very popular in all layers of the financial system and when it is purchased without to the risks imposed, we can begin talking about a bubble." Francois Rochon

"The problem is that in bubbles, “attractive" morphs into "attractive at any price." People often say, "It's not cheap, but I think it'll keep going up because of excess liquidity" (or any number of other reasons). In other words, they say, "It's fully priced, but I think it'll become more so." Buying or holding on that basis is extremely chancy, but that's what makes bubbles. In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralizes any prudence that might otherwise hold sway. To sum up, I believe that an investment approach based on solid value is the most dependable. In contrast, counting on others to give you a profit regardless of value, relying on a bubble is probably the least." Howard Marks

"Since time immemorial, the financial markets of the world have been prone to bubbles in everything from tulips and art to shares and houses. Therefore, obviously it is very important for investors to understand them. All bubbles start as powerful fundamental developments and legitimate investment opportunities. They become bubbles or manias or whatever you want to call them when investors in their euphoric optimism project future results, not based on rational fundamentals, but on continuation of past results." Barton Biggs

"When a bubble finally bursts, the so-called fallacy of composition comes into play and inflames mob psychology. This theorem says that, in a crisis, the action that is rational for each individual is irrational for the group as a whole and creates a disastrous outcome." Barton Biggs

"Asset bubbles, where investor mania drives prices to extreme heights, are a recurring puzzle for investors. Can you profit? Can you avoid major losses? In my experience, it has been easy to spot a bubble after it is well under way, as prices and valuations far exceed historical norms and seem to have no economic sense. .. Making a profit is trickier. Like a Ponzi scheme, it is not easy to tell when it will end. If you bet too early you can be ruined in the short run even though you are right in the long run." Ed Thorp

"What I want to remind you to remember is that bubbles burst in the wake of hysteria, while plummeting prices usually end in panic." Jim Rogers

“Stock prices advancing, themselves, brings in buying. It doesn’t go on forever, but it creates its own momentum, to some extent.” Warren Buffett

“A major cause of higher prices is higher prices; but when the trend is reversed, then lower prices lead to still lower prices. To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.” Sir John Templeton

“There’s no question that rising prices create their own excitement. So when people see gold go up a lot — I mean, if your neighbor owns some gold, and you think you’re smarter than he is, and you didn’t own any, and your wife says to you, you know, “How come that jerk next door is making money, you know, and you’re just sitting here?” It can start affecting behavior. And people like to get in on things that have been rising in price and all of that. But over time, that has not been the way to get rich.” Warren Buffett

“When there is a frenzy of activity in one area of the market there is often an anti-bubble of discarded companies. In the dot com era these were companies with steady cash flow. Where is today’s anti-bubble?” Nick Sleep

“From any starting point, money flowing into one category and away from another can wreak havoc with accustomed levels of valuation and can cause egregious mispricings, both too high and too low.” Seth Klarman

“It’s very important to understand that when there is a commodity boom or a technology boom it draws the wind out of other market segments.” Alex Roepers

“At the top of the bubble, technology stocks seemed destined to consume all the world’s capital. It was not enough for all the new money to go into this sector. In order to feed the monster, investors sold everything from old economy stocks to Treasuries to get fully invested in the bubble. Value investing fell into complete disrepute.” David Einhorn

“Once a price history develops that causes people to start looking at an asset that they never looked at before and to get envious of the fact that their neighbour made a lot of money without any apparent effort because he saw this early and so on, that takes over.” Warren Buffett

“Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. That process feeds on itself. As traders push up short-term returns, they attract more traders. Before long, the dominant market price-setters with the most authority are those with shorter time horizons. The dot-com bubble was a time of irrational optimism about the future. But one of the most common headlines of that era was record trading volume . . . This was the era of day trading, short-term option contracts, and up-to-the-minute market commentary. It’s not the kind of thing you’d associate with long term views.” Morgan Housel

Further Reading:
‘Stock Market Bubble?’ Ray Dalio - Bridgewater Associates. 2021.