Learning To Love Investment Bubbles by Meb Faber
Guest: Episode 24 is just Meb.
Date: 10/3/16
Run-Time: 21:11
Topics: Episode 24 brings us back to our most controversial episode format: the “solo Meb” show. Listeners seem to either love and loathe this style of show. If you fall into the “loathe” camp, it’s a short episode so the pain is limited. But hopefully you will listen, as Meb Faber dives into the fascinating, and possibly timely, subject of bubbles. The quick takeaway? Using a trend following approach would have helped you reduce drawdowns as popping market bubbles ravaged portfolios. And this would have helped you achieve investing’s main goal: surviving another day. Meb then dives in, first defining bubbles, then referencing three of the most famous bubbles in history: the South Sea Company bubble, the Mississippi bubble, and the Dutch tulip mania, each of which saw drawdowns of 90%. Meb Faber dives deeper into the South Sea Company bubble. In short, the South Sea Company was a huge pump-and-dump scheme – catching none other than Sir Isaac Newton in its carnage. From here, Meb Faber discusses strategies for capturing the upside of bubbles while protecting yourself from the fallout. One solution? Trend following, using the 10-month simple moving average. It does a great job of reducing volatility and drawdowns, and improving returns. Meb Faber ends the show by revisiting the South Sea Company bubble, this time putting an actual figure on Newton’s losses, and comparing them to what a trend follower would have made. What’s the difference? Find out in Episode 24.
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Links from the Episode:
- “Learning to Love Investment Bubbles: What if Sir Isaac Newton Had Been a Trendfollower?” – Faber
- “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”, GMO
- Contrarian Investment Strategies, Dreman
- Extraordinary Popular Delusions and the Madness of Crowds, Mackay
- “I Want to Break Free, or, Strategic Asset Allocation Does Not Equal Static Asset Allocation” James Montier
- “Where the Black Swans Hide” – Faber
Stock Distributions:
- Why Stock Markets Crash: Critical Events in Complex Financial Systems – Didier Sornette
- The Misbehavior of Markets by Benoit Mandelbrot
- Fooled by Randomness and The Black Swan: The Impact of the Highly Improbable by Taleb
- Finding Alpha – by Eric Falkenstein
- Market Volatility – Robert Shiller
- Optimal Portfolio Modeling – Philip McDonnell
- Fractal Market Analysis – Edgar Peters
- More Than You Know: Finding Financial Wisdom in Unconventional Places – Michael Mauboussin
- The Failure of Risk Management: Why It’s Broken and How to Fix It – Douglas Hubbard
Market Bubbles:
- Famous First Bubbles – Garber
- Manias, Panics, and Crashes by Charles Kindleberger
- Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay
- Irrational Exuberance – by Robert Shiller
- A Short History of Financial Euphoria and The Great Crash 1929 – John Kenneth Galbraith
- The Panic of 1907: Lessons Learned from the Market’s Perfect Storm – Mark Bruner
- The Little Book of Behavioral Investing – James Montier
History of Markets:
- Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, and Mike Staunton
- Stocks for the Long Run by Jeremy Siegel
- Reminiscences of a Stock Operator by Edwin LeFèvre
- When Genius Failed by Roger Lowenstein
- Capital Ideas, Capital Ideas Evolving, and Against the Gods by Peter Bernstein
- Ibbotson Yearbook by Ibbotson Associates
- The CRB Commodity Yearbook by Commodity Research Bureau
- The Essays of Warren Buffett by Warren E. Buffett and Lawrence A. Cunningham
- Fortune’s Formula by William Poundstone
- The Myth of the Rational Market – Justin Fox
- The Great Game: The Emergence of Wall Street as a World Power: 1653-2000 – John Gordon
Read the transcript here.
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