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.Continue reading “Managing Time Horizons”