On Bubble Watch

I just finished reading Howard Marks recent memo titled On Bubble Watch and below are few key points worth sharing:

• A bubble or crash is more a state of mind than a quantitative calculation. Characterized by:
  1. highly irrational exuberance
  2. outright adoration of the subject companies, and a belief that they can’t miss
  3. massive fear of being left behind if one fails to participate (‘‘FOMO’’), and
  4. resulting conviction that, for these stocks, “there’s no price too high.”
• When everyone believes things can only get better forever, it can be hard to find anything that’s reasonably
  priced.
• Attention to history can serve as a tether, keeping a favored group grounded on terra firma. But if something’s
  new, meaning there is no history, then there’s nothing to temper enthusiasm.
• Some guiding principles:
  1. It’s not what you buy, it’s what you pay that counts.
  2. Good investing doesn’t come from buying good things, but from buying things well.
  3. There’s no asset so good that it can’t become overpriced and thus dangerous, and there are few assets so
     bad that they can’t get cheap enough to be a bargain.
• When something is on the pedestal of popularity, the risk of a decline is high. When people assume – and price
  in – an expectation that things can only get better, the damage done by negative surprises is profound.
• I always say the riskiest thing in the world is the belief that there’s no risk. In a similar vein, heated
  buying spurred by the observation that stocks had never performed poorly for a long period caused stock prices
  to rise to a point from which they were destined to do just that.
• S&P 500 had a cumulative return of zero for the more than eleven years from the bubble peak in mid-2000 until
  December 2011
• The point is that when stocks rise too fast – out of proportion to the growth in the underlying companies’ earnings – they’re unlikely to keep on appreciating.