The Indian markets benchmarks Sensex @29000 and Nifty moving towards 9000 mark, has the music begun, has blogthe party started? Many of the Market Bear analysts have already cautioned the move.  Too much information these days in market is extremely dangerous.

Has the bubble formation started how long it will last, to be honest I don’t know. Bottom line the long-term story remains bullish and if you are in quality stocks you will get returns.

So how do we identify the bubble problem, the problem with bubbles is that if you sell stocks before the bubble bursts, you look foolish, but you also look foolish if you sell stocks after the bubble bursts.

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 

It’s easy to read then identifying in the real life, Yale professor Robert Shiller outlined how to identify bubbles in his seminal book, Irrational Exuberance (As you will read, there is some overlap in our identification process of bubble finding):

  • The sharp increase in the price of an asset or share class
  • Great public excitement about these price increases
  • An accompanying media frenzy.
  • Growing interest in the class among the general public
  • New Era‘ theories justifying the high price
  • A decline in lending standards

Some other conditions leading up to bubbles identified

  1. Debt is cheap.
  2. Debt is plentiful.
  3. There is the egregious use of debt.
  4. A new marginal (and sizeable) buyer of an asset class appears.
  5. After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
  6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.
  7. The newer the valuation methodology in vogue the greater the degree of bubbliness.
  8. Bad valuation methodologies drive out good valuation methodologies.
  9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
  10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed “financial weapons of mass destruction”).

While some of the above conditions/laws have been met today, many have not.

While debt is cheap and plentiful to some, it is not universally so, as lending standards (especially mortgages and small-business loans) are relatively tight.

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