This Financial Historian Says Embrace the Bubble

Warren Buffett is famous for holding more than $340 billion in cash in the war chest of his company, Berkshire Hathaway. Investors see that pile and wonder if they should also keep their cash out of the stock market.

Which is smarter: to join the boom or stay in cash and dodge a possible bust?

Today's Oracle of Finance, financial historian William N. Goetzmann, has deeply researched this question:

Placing a large weight on avoiding a bubble, or misunderstanding the frequency of a crash following a boom, is dangerous for the long-term investor because it forgoes the equity risk premium. From a historical perspective, it is important to recognize that the overwhelming proportion of booms that doubled market values in a single calendar year were not followed by a crash that gave back these gains.
— William N. Goetzmann

Goetzmann says the fear of a bubble can cost investors far more than the bubble itself.

Howard Marks made a similar point when he recently said the market had reached "INVESTCON 5," but cautioned that selling out of the market could cost you more than staying in it.

Goetzmann hasn't said much about the current AI boom. But in his research he highlighted a relevant example: an Italian Renaissance bank called the Casa di San Giorgio. In 1603, many feared its valuations had reached a peak. If they had sold, they would have missed a subsequent 20-year boom in prices. The ultimate "bubble pop" wasn't until 80 years later.

Read more in Goetzmann's paper, "Bubble Investing: Learning from History, which you can download for free.

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