Qubit: CFA Book on Bubbles
The CFA Institute published a book on how market bubbles do not exist.
For example, the internet bubble (or Dot-Com Boom) was not really a bubble.
“Another argument for why bubbles must exist is the 1990–2000 dot[.]com stock rise and crash. How could that not have been a bubble, when some Internet stocks rose in price to seemingly unjustifiable levels only to later crash? The answer is that traditional tools for valuing Internet stocks are flawed. Valuation must include consideration of the uncertainty of these companies’ future earnings streams. Here the solution is to use models based on Bayesian Learning techniques. These tools explain the rise and fall of the Internet stocks without resorting to bubbles. They also can explain the stock market crash in 1929 as well as the great bull market of the 1920s in a way that does not require the speculative bubble thesis that so many authors have endorsed.”
“Our response is that memories are not short and history is not ignored. These purported bubbles either never happened or were substantially different from what these authors understand to have occurred. Accordingly, we have no reason to believe investors are either permanently stupid or irrational. There may be occasional ‘blockheads’ in the market, to use Galbraith’s quoted term, but we will never meet such a chump on the trading floor.
There is no better proof of this than the index fund revolution. Despite the enormous attention given to bubbles, a significant and growing portion of the investing public implicitly trusts the efficiency of the stock market. We know this to be true because so many investors put their capital in index funds. Over the past few decades, there has been a wholesale migration to efficient-market investment products like index funds and index-related products, such as exchange-traded funds.”
Source:
Bursting the Bubble: Rationality in a Seemingly Irrational Market
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