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  • Writer's pictureMandino Tan

Is the Market a Big Bubble? Here's Ray Dalio explaining it to you in 10mins

Updated: Apr 4, 2022



Ray Dalio

Average annualised return: 12% since 1991

Manages: $160 Billion in assets


Considered one of the top hedge fund managers of all time.


First, of all, what is a bubble?


Ray categories into 6 components to quantify

  1. Prices Are High Relative to Traditional Measures

  2. Prices Are Discounting Unsustainable Conditions

  3. New Buyers Have Entered the Market

  4. There is Board Bullish Sentiment

  5. Purchases Are Being Financed by High Leverage

  6. Buyers/Businesses Have Made Extended Forward Purchases

1. Prices Are High Relative to Traditional Measures

One example is comparing it to bond yields.


If Singapore Savings Bonds (SSB) were to offer you a 3% return, naturally people would look into investing in such bonds as it gives a decent return with a "guarantee" as compared to previously lower yields, such as 1%. If SSB were to offer you 0.23% returns for the next 10 years like in November 2020. Would you invest in it?


2. Prices Are Discounting Unsustainable Conditions

"Unsustainable" demand can't keep up. Thus, when the demands go down, prices would go down.


3. New Buyers Have Entered the Market

Here's a quick story of Joseph P. Kennedy:


After having made a bundle owning stocks in the roaring bull market of the 1920s, Joe Kennedy Sr. found himself needing to get his shoes polished up.


While sitting in the shoeshine chair, Kennedy Sr. was alarmed to have the shoeshine boy gift him with several tips on which stocks he should own — yes, a shoeshine boy playing the stock market.


This unsolicited advice resulted in a life-changing moment for Kennedy Sr. who promptly went back to his office and started unloading his stock portfolio.


In fact, he didn’t just get out of the market, he aggressively shorted it — and got filthy rich because of it during the epic crash that soon followed.


They don’t ring bells at the top, but apparently, when shoeshine boys start giving stock advice it is time to head for the exits.


4. There is Broad Bullish Sentiment

"Not having these things makes you feel dumb."


5. Purchases Are being Finances by High Leveraged

People borrowing to buy things. Just look at the '08 housing bubble


6. Buyers/Businesses Have Made Extended Forward Purchases

Buying early in case the prices keep going up.


For example, if oil prices keep going up, Singapore Airlines would do forward purchasing to secure the price before actual prices of oil go up.


Conclusion:

These indicators must be interpreted with context and understanding of the market. Here in the video, Ray explains how compares different indicators and explains his conclusion which is this.


Not everything is a bubble. Some things are, some things are not.


Watch his quick 10mins video here:


DISCLAIMER:

All information are for informational purposes only and should not be relied upon as financial advice.

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