Since 1841 when Charles Mackay published his still read amazing best seller “The Extraordinary Popular Delusions and the Madness of Crowds” people believe that there is a pattern to human madness. That is great, and maybe right too. However, the worst delusion is that they believe that by watching closely, they will be able to spot it well in time and be able to stay away from the bubble.

Far from the truth. Real far.

Not too many people know that within a few years of publishing this book, Charles himself got wiped out in a railroad share bubble. So whether it is Charles of 1841 or a John Doe who got wiped out in Enron, most of us are capable of rationalising an event. Once ane event happens all of us look like experts who will say “this was bound to happen”. It it was so INEVITABLE,was it so OBVIOUS? Data makes it look easier.

Ask yourself – Are we in a boom in Financial Services?

With the listing of Hdfc amc and Hdfc Life, the market cap of Hdfc group is now greater than the market cap of the Tata Group. Is that proof that Hdfc group is over-priced or that the Tata group has lost heavily in the recent past? In financial services should fast growth be rewarded – only to be brutally punished later on (Dhfl) or steady growth with quality rewarded better (Chola, Sundaram). No clue.

Not very long ago the market cap of Dlf was not far away from the market cap of the Tata group. Then one digit fell off the price off Dlf. How many RE lovers had spotted the bubble.

Take Mumbai’s RE – it has ALWAYS been high, and beyond the reach of the working class – I mean in the past 30 years at least. Those who bought in certain places (Bandra, not evenSantacruz) say that they have got 15% cagr over the past 50 years. Not sure, but claims surely are made. In most cases the prices seem to be a bubble because the rental yields are far worse than savings bank rate. Is it a bubble? If it is a bubble, does it mean it is going to fall?

Take the case of Mnc fmcg. Gillette, PnG, Colgate, Hul – have rarely been cheap – and we don’t know when it will break. Or will an Indian businessman come with products to replace these simple products and take away the PE. Is it a bubble?

Take the international scene – when a Bond fund manager is willing to lock in his money for 10 years at 1% yield in a GSec is that not an interest rate (aka asset prices) bubble? we all knew it would crack? did any of us expect a 20 year US treasury at zero? Did that ‘bubble’ break? Is the FED trying hard to come out of that downward interest rate spiral that they created? Will they come out? Can one asset ever be priced at zero?

I guess we will never be able to build a ‘bubble – thermometer’. So listen to Graham. Don’t go under 25% in equity, and never above 75%. I will never go to 25% – not in my life-time is what I mean. I will stay below 75% only if I take my RE into my net worth. Even then I find that I am nearer 95% in equity. Time for correction perhaps. At least at 70 and also at 75 I want to buy some annuities – the only asset that does not become zero in your own life time.

I cannot spot bubbles. Even worse I will not know what to do. If you spot a bubble early and go short – you could get burnt. One company which I knew was a bubble was Silverline. At Rs. 30 I thought it was over-priced. It went right up to Rs. 1200 – maybe even more, but it does not matter. If I had gone short at say 300 – on just 5000 shares – and covered it at 800 – I would have lost 25L for the ERROR of thinking that the bluff will be called. The bluff was called (i was right) but only after it went to Rs. 3000 (pathetic timing).

So when you see a bubble – or think it is a bubble – STAY AWAY – shorting can be as LETHAL as buying!!