Former Curious Capitalist guest blogger Mark Gimein has been writing up a storm lately at The Big Money, Slate’s new business site. I really like his latest piece, about why it’s so hard to make money betting against bubbles. A sample:
Bubbles actually punish rational expectations. Andrew Lo, an economist at MIT… explains it like this: “A bubble is a very strong upward trend in prices that is not necessarily based on reason or rationality, and unless one gets the timing just right, it’s easy to be crushed by the onslaught of enthusiastic investors.” As Lo points out, a lot of fund managers saw a bubble forming and bet against financial stocks in 2005 and 2006. And basically, they got killed.
The walloping taken by those who followed their rational instincts and analysis warned others against trying the same thing. So, as the credit bubble got bigger, fewer and fewer people bet against it. There were exceptions: Hedge-fund manager John Paulson made more than $3 billion betting on the collapse of the mortgage market. But in the main, the lesson that investors took from 2005 and 2006 was that the last place they wanted to be was standing there taking arms against the sea of troubles and betting against the wave.
Okay, it’s not a totally original argument. I’ve never been able to find evidence that John Maynard Keynes actually said, “The market can stay irrational longer than you can stay solvent.” But people have been saying he said it for decades. Still, it’s a good essay by Gimein. Also, he’s blogging now. Aren’t we all?