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It's actually relatively easy to see when it's become fad/fraud driven. The hard part is predicting when the music is going to stop, because that's controlled

It's actually relatively easy to see when it's become fad/fraud driven. The hard part is predicting when the music is going to stop, because that's controlled by the people investing. Some of the best times to invest in a bubble come during the final frenzy. Warren Buffett was absolutely correct that the dot com bubble was vapid, but he still lost money betting that way. People were predicting in 2003 that the housing market would crash by 2005, with detailed and accurate predictions about how the crash would happen, just two years too early. It is quite clear that the Australian (and, I've heard, the Canadian) housing market is in a bubble, but not so clear how long it's going to go on. One person who seems to know how to think about these things is George Soros. His New Paradigm for Financial Markets is a good read on this question.

rpeden 14y ago
You're right about the Canadian housing market; There are those predicting it is in a bubble, the most vocal of whom is a former government MP blogging at http://greaterfool.ca http://greaterfool.ca . The funny thing is that even after watching the carnage in the US housing market, people here don't believe it. I hear countless homeowners talking about housing is the best investment you can make, prices won't fall, it is different here, etc, etc.
- phillmv 14y ago
  House prices here in Toronto are totally obscene. I genuinely don't understand how people are forking over $500k on average.
  - meric 14y ago
    Oh god. I'm in Australia and if you tell me I can get a house for $500k I'll say it's cheap. The apartment I'm living in is worth $550k. The only houses as cheap as $500k are over an hour from the CBD. Where I am living (half hour away), houses start from $800k up to $1.5m. The average (house+apartment) price is still below $600k, though.
    - roc 14y ago
      Does Australian housing also have a huge influx of Chinese buyers? I wonder to what degree their purchasing overseas is fueling that growth, not unlike Japanese purchasing in the 80s. Anecdotally, they seem to be heavily involved in Canada's situation.
      - meric 14y ago
        Anecdotally that is one of the factors driving up prices. The other main factor is the slowness in which the government opens up new land for building. Also new buildings on new land are taxed more heavily.
        roc 14y ago
        I'll admit I don't know the first thing about the degree of suburban sprawl, or whether greenfield development taxes are sane or not in Australia. But as an American having grown up and multiply paid for the problems caused by sprawl, I'm definitely on the side of the concept of high greenfield development taxes. No building is an island and there are very real and very steep costs in maintaining and growing infrastructure to handle sprawl. It's crucial to ensure those costs are accounted for in prices. But I digress.
roc 14y ago
I still think the cut-over from legitimate growth to fad/fraud-driven is murky, but you're absolutely right that it's trivial to identify fad/fraud long before the bust. That said, my feeling is that betting against the bubble is ultimately as bad as betting with it. Either approach can reap enormous gains, if you get the timing right. Which shakes out to: broad bets are little different from gambling. And I think investment shouldn't be gambling. As such, the 'best' (in my terms) approach to a bubble would be to hold onto your money while it grows. Then, when it bursts, pounce on the depressed prices of the good investments. It appears to me that Buffet learned that lesson after the dot-com bust and has been executing that plan on grand scale since 2008.
- epo 14y ago
  The prudent approach to fad investments is to ignore them, instead find things which are overlooked in the fad, hence undervalued, and put your money in them. I'd be surprised if Buffet was doing anything much different. And, by definition, no one can 'get the timing right' in bubbles, some are lucky, most aren't.

rpeden 14y ago

You're right about the Canadian housing market; There are those predicting it is in a bubble, the most vocal of whom is a former government MP blogging at http://greaterfool.ca http://greaterfool.ca . The funny thing is that even after watching the carnage in the US housing market, people here don't believe it. I hear countless homeowners talking about housing is the best investment you can make, prices won't fall, it is different here, etc, etc.

phillmv 14y ago
House prices here in Toronto are totally obscene. I genuinely don't understand how people are forking over $500k on average.
- meric 14y ago
  Oh god. I'm in Australia and if you tell me I can get a house for $500k I'll say it's cheap. The apartment I'm living in is worth $550k. The only houses as cheap as $500k are over an hour from the CBD. Where I am living (half hour away), houses start from $800k up to $1.5m. The average (house+apartment) price is still below $600k, though.
  - roc 14y ago
    Does Australian housing also have a huge influx of Chinese buyers? I wonder to what degree their purchasing overseas is fueling that growth, not unlike Japanese purchasing in the 80s. Anecdotally, they seem to be heavily involved in Canada's situation.
    - meric 14y ago
      Anecdotally that is one of the factors driving up prices. The other main factor is the slowness in which the government opens up new land for building. Also new buildings on new land are taxed more heavily.
      - roc 14y ago
        I'll admit I don't know the first thing about the degree of suburban sprawl, or whether greenfield development taxes are sane or not in Australia. But as an American having grown up and multiply paid for the problems caused by sprawl, I'm definitely on the side of the concept of high greenfield development taxes. No building is an island and there are very real and very steep costs in maintaining and growing infrastructure to handle sprawl. It's crucial to ensure those costs are accounted for in prices. But I digress.

roc 14y ago

I still think the cut-over from legitimate growth to fad/fraud-driven is murky, but you're absolutely right that it's trivial to identify fad/fraud long before the bust. That said, my feeling is that betting against the bubble is ultimately as bad as betting with it. Either approach can reap enormous gains, if you get the timing right. Which shakes out to: broad bets are little different from gambling. And I think investment shouldn't be gambling. As such, the 'best' (in my terms) approach to a bubble would be to hold onto your money while it grows. Then, when it bursts, pounce on the depressed prices of the good investments. It appears to me that Buffet learned that lesson after the dot-com bust and has been executing that plan on grand scale since 2008.

epo 14y ago
The prudent approach to fad investments is to ignore them, instead find things which are overlooked in the fad, hence undervalued, and put your money in them. I'd be surprised if Buffet was doing anything much different. And, by definition, no one can 'get the timing right' in bubbles, some are lucky, most aren't.