I recently came across the clearest definition of a bubble in an asset class:
“When investors have different goals and time horizons—and they do in every asset class— prices that look ridiculous to one person can make sense to another…
Bubbles form when the momentum of short-term returns attract enough money that the makeup of investors shifts from mostly long term to mostly short term. That process feeds on itself. As traders push up short-term returns, they attract even more traders. Before long, the dominant market price-setters with the most authority are those with shorter time horizons.
Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.”The Psychology of Money (by Morgan Housel)
What was particularly impressive about this framework was that it can be applied to any forms of investment — including people. When you have a “different” time horizon when working with someone, your behaviors will change. Those with a short-term views will become more transactional (as there’s no lasting relationship or long-term time horizon to get the “returns”) and “ruthless” vs long-term views will become more relationship driven as one may see the “potential” of someone and with that have more patience to invest/coach the person to become better. Of course, there are other factors to consider such as talent/aptitude, integrity, personal values just as one would look at such in a company when value investing over a long-term time horizon.
As investors with deep pockets and lack of need for immediate liquidity can invest in asset classes that require long-term time commitments (e.g. becoming an LP in a seed fund), people and organizations who have strong teams with high bench strength can harness the time horizon to invest in people over a longer period of time. While high growth startups may not have this luxury, it is deeply rewarding to see people step up and grow phenomenally over a long period of time during their tenure.
Organizations have their natural and default time horizons for their projects and people, so being able to understand your own organization’s time horizons and navigating or altering them as the need and situations change can become a powerful tool for the management team.