The ‘Bubble Question’

I get this question everyday. I use the term ‘bubble’ more of late because the world is so connected and these pockets of euphoria continue to pop up.

Fred Wilson has been hearing it a lot as well. Here is his post this week on the subject. Read it all, but here is his conclusion:

It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

I like to keep the big picture simple and with this backdrop since 2009, I have been long (never enough) and continually putting money to work.

I have already found an investment strategy that works for me and as a bonus it makes my limited partners comfortable to invest with me as well. With that established, for years I am trying to fill my funnel with ideas, people/teams and stocks that fit this profile.

The more subtle part is trying to take your foot off the gas – even slow down and possibly reverse – before the larger backdrop changes. For that part, I want to follow the best of the best, people that have seen and invested through the ‘slopes’ as I call them. In 2001, and 2008, the slopes were sickening to the downside. Today, they are getting silly to the upside. I also want to feed myself with historical data and charts have helped me get through the tediousness of it.

The ‘slopes’ matter to me because I also invest in public markets and historically, the steeper the upslopes, the steeper the inevitable declines.

I also know (having tried mostly fruitlessly to time the turn in the ‘slopes’), that trends can run much longer than expected.

So, for stock market trends I like more historical data to help me ‘look out’ over the edge. I also like to use bigger data sets and longer look back periods.

This one chart has got my attention this weekend from Ryan Detrick:

I know from other charts and the sentiment I see on Stocktwits and my travels that the slopes surrounding me (including the explanations from Fred’s post) are ‘steep’ to the upside. I also can take one look at this data and say the odds are pretty good that 6 -12 months out we could be in the middle of some good declines based on the historical data for US Small Cap Stocks.

The past few weeks I put on some short positions again adding $BIS and $SDS (in real-time on Stcoktwits). They are working, so even though I am making a few ‘Rubles’, I am not thrilled. I may cover Monday but I could also be forced to sell more of my longs. Like I said earlier, I have enjoyed this ride since 2009 and I don’t want to accelerate into a wall. The data I am putting together combined with my risk profile says to slow down.

Chime in of course.