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Revisit bubbles as the market debubbles: Bubbles in moderation can make history

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There are two things that can kill a company during a bubble: overoptimism and a reluctance to be too optimistic.

Original title:Revisiting Bubbles as Markets Debubble: Controlled Bubbles Can Make History.

By Byrne Hobart,financialAnd technology writers,investmentConsultant

Leo Young, Chainnews

Asset prices rise sharply, investors get rich, and criticism of market bubbles becomes a weapon of the FOMO: the easiest way to tolerate other people getting rich is to assume that wealth is a reward for their stupidity.

And when the bubble burst and prices fell, all sorts of ideas followed; The bears' claims have been validated, and the many who witnessed them have had more time to tell their own stories. Former employees of companies like Enron, Theranos, Long-Term Capital Managpent and Countrywide Financial also had time to speak out and were more motivated to talk to reporters when they weren't working.

Even though the word "bubble" is usually used in a negative way, sometimes a certain amount of bubbles can have a positive effect on the world. A bubble is an irrational shared belief in a better future... This would not only encourage investors to bid up asset prices, it would also encourage entrepreneurs to build a collectively imagined future. (Another sociological meaning of a bubble is a "protective filter," a kind of fact-free, critical barrier that allows believers to confirm that they are right in the face of all external evidence. This is not a complete coincidence.)

The first smartphone bubble didn't show up in the stock price. It was Apple's belief that millions of consumers could buy a fully functional touch-screen, networked device for a few hundred dollars. When Apple designed the iPhone, their belief was fully backed up by facts. For example, their first test touch-screen device was bulky. (Unlocking the iPhone describes early internal iPhone beta as "a tablet-sized device with a projector thrown on a blank sheet of paper.") Prototype doesn't look like something you could put in a trouser pocket). But it was soon improved, and it became what it is today.

The less likely it is to achieve a given useful product portfolio function, the more surprising the end result. Any organization that does this kind of in-depth research and/or development needs to convince the team that every step, while difficult, is a step toward success. That explains another way to look at Apple's much-touted recipe for success: They don't just want to make a splash with their new product, but they also don't want anyone who is betting against the future of touchscreens to give the iPhone team any real, deep feedback.

This also helps explain why projects take a long time. The benefits are not only to get effective feedback, but also to avoid ineffective feedback.

If there are five of us in a room every day, the only way a true believer can work toward a seemingly impossible goal is to surround himself with other true believers.

The power of bubbles is everywhere

The power of bubbles is on display in other areas, too. In politics, many successful movements have experienced long periods of obscurity or even persecution. Successors of communist governments in eastern Europe have often experienced persecution and imprisonment. In the United States, neoconservatism and modernitycurrencyTheories (in more relaxed circumstances) remain outside power for a long time, biding their time and raising their minds.

But that loyalty has a sunk cost: the more difficulties you encounter once you commit, the harder it is to change your mind -- which means you're willing to commit for nothing.

This bubble power even applies to personal relationships. To buy Amazon or Pets.com in 2000 was to bet on their growth over the next 10 years. To get married was to bet on your feelings for someone over the next 50 years. These are big things, and there is no idealistic irrationality at all.

In other bubbles, irrationality is a coordinating mechanism. It's the way one person tells another to take the plan seriously, and a small number of exceptionally loyal and irrational people can achieve unexpected success.

Managing bubble expectations means being a cautious time traveler

One reason why much of the arbitrage on bubbles has been concentrated is that finance is all about holding a variety of assets and keeping detailed records of the potential for future cash flows. A transactional economy has its flaws, but historically it has been a source of wealth; There is much to see behind these deals.

While we don't know the full details of how the South Sea Company was run, or what management really thought, we have detailed records of who bought how many shares for how much money, and where the money came from. (Retrospective studies of this kind, for example, show that women benefited more than men from the bubble that was pricked 300 years ago. These studies are good for showing the connection between asset prices and the real world. Even with IPOs and other forms of fundraising, high prices for certain companies tell people that something important is going on. It's a signal to grow the business.)

Financial markets have another benefit for those learning the lessons of bubbles and irrationality: they encourage people to keep track of what they think. Investment memos are valuable documents, especially if they prove wrong. Because it's a record of justifying a particular investment at a particular price, and it has a lot of assumptions about how it's going to be profitable in the future. So a good investment memo is a kind of science fiction that predicts the future -- not impossible, since robots, online forums, cryptocurrencies, nuclear weapons, space travel and other technologies long predate the development of science fiction.

Sometimes science fiction is just out of place. Star Trek and Star Wars both have computers, but Moore's Law applies to spaceships in their worlds, and the stagnation of the space shuttle between 1970 and 2010 is the computer. Star Trek's predictions of the future were also partly right: tangible goods became cheap, Amazon prices and delivery speeds rapidly approaching replicators. But other things are not necessarily true. Optimists who bought Amazon in 2000 will eventually make a profit. But even if the purchase was pure luck, no one imagined that Amazon's value came from AWS rather than physical goods. (Dreamers like this have been around before. The early appeal of ARPANET was to open up more powerful computers and programs, rather than just access to information, which at least pointed the way to cloud computing.)

In effect, raising money is a form of statistical time travel, bringing future cash to the present at a cost. But other forms of technological time travel that could bring future products to us are much less well known. So managing bubble expectations means being a careful time traveler, making sure that the future looks as much like that as possible, and that time-traveling companies don't go out of business or corner themselves for lack of cash.

How to value a bubble?

Bubbles can also have direct benefits, or at least positive spillovers: the telecoms bubble of the 1990s produced cheap fibre, which worked when the world was ready for YouTube. Even the housing bubble had a positive effect: it brought housing inventory. Because new properties are so standardised, they can be well trained with "iBuying" algorithms-a rare case of a low-tech bubble with high-tech consequences. Even so, there is always a question about prices: how do you tell when a market is overheated?

The bubble valuation debate is usually summed up as a framing issue. To be specific, there are roughly two forms:

The question of how long this trend will last: Will we be fed up with video conferencing, or will it gradually replace physical contact? Will video-on-demand cannibalize TV, or will it replace it altogether?

If a trend is fleeting, a company's current growth is just a bump before a crash. E-commerce stocks had a pretty good run in 1999, as did Beanie Babies, and judgment calls are needed to determine which trends will continue. But because of the power of compound interest rates, a trend that is a little more persistent than it seems can have an outsized impact.

The Product Economy and Feedback Loop Problem: Does a company's success with one product mean that the next one will be successful?

Angry Birds and Candy Crush Saga have had trouble following their first blockbuster product into a sustained hit despite the best efforts of their parent companies. Turning a blockbuster into a serial blockbuster is hard, though Disney has turned the model into a science. Each time Amazon adds a category, a user will buy that category, and then a merchant will offer an updated category. Each time Google is tweaked, there are new ways to monetize click-through rates, but it also reinforces more search instincts. Facebook's marketplace is a form of monetisation and will give buyers and sellers more reason to log in every day; Facebook, it turns out, is the most addictiveThe gameIt's an Affordable Exercise Equipment Quest. I play it every day.

How to exploit bubbles?

There are two things that can kill a company during a bubble: overoptimism and a reluctance to be too optimistic. Realists fail in bubbles because competitors are so aggressive that they eventually copy them. But the buy-froth argument also fails, because naive firms struggle to survive changes in the environment. Now look at Amazon, and the reason they're doing so well is because their theory is constantly evolving.

One way to avoid failure is to build your business around building future fads rather than solving current problems.

At the peak of optimism, certain companies are tempted to announce concept products to attract investors and distance themselves from competitors. The other is to keep developing "stealth products" -- products that could disrupt the market once they are launched, but don't reveal them until they are released. Disclosing secrets the first time doesn't attract investors, and once the surprise works, investors perceive them as more likely to win, even if they don't see the prospect of success.

The stealth products were released in a way that exploited the healthiest ways of bubbles: a small group of people who saw the future differently from the market were the only ones who could build it; But announcing the specs ahead of time is an extension of credit, not an establishment of credit. Having a public vision and confidential road map for the future of the product is a great way to raise money and attract talent (I've interviewed several companies that I not only wanted to join, but were also curious about their businesses).

A company's vision of the future is likely to be wrong, or its execution will be wrong. But this is not just entrepreneurship, it's science fiction. Getting involved in a bubble isn't just entrepreneurship, it's art. Science fiction is good art even if the story doesn't come true.