Warren Buffett brilliantly explains how bubbles form.
In an interview regarding the work of the Financial Crisis Inquiry Commission (Financial Crisis Inquiry Commission, FCIC), in 2010, Warren Buffett answered a few questions about what he thought the real estate and credit bubble had created.
Warren Buffett
During the interview, he also gave a crystal clear explanation of how bubbles form.
This is an excellent material for anyone interested in an investment or behavioral economy.
The interview came from a recent discharge of documents from the National Archives, which published transcripts, meeting agendas and confidentiality agreements from FCIC. The group was created by Congress after the crisis to study the causes of this event.
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So, Buffett (our selection):
"... My former boss, Ben Graham, told me one of his observations about 50 years ago; I remember it, and now I saw his confirmation.
He said: "You can get a much more difficult problem in investing, based on a sound premise, than relying on a false one."
If you somehow assume that the moon is made of green cheese or something like that, then it is, at first glance, absurd. If you base yourself on the premise that common stocks are preferable to bonds, you get a deep foundation for a bubble [1929]. People think that stocks become a wonderful investment, and they forget the limitations of the original premise [....]. As a result, after some time, this initial premise, which was a kind of incentive for what turned out to be a bubble, is forgotten, and the price starts to act.
Now we saw the same thing in real estate. Fully sound is the premise that real estate will cost more over time as the dollar becomes cheaper. [...]
And since more than 66% of people want to have their own home and because you can borrow money for it and dream of buying a home, then if you really believe that real estate will be more expensive, you buy a house right away, as the opportunity arises. . And this is a very sensible premise. However, this applies, of course, to real estate sold for something approximately equal to the replacement price, and to a situation with not very much faster inflation.
As a result, based on a sound premise that buying a house this year is a good idea, since it will cost more next year, you are aiming to buy a house; the fact that you will be able to finance this begins to deform after a while, if housing prices rise 10 percent a year and inflation only a couple. Soon the price starts to work - or to some extent the price - and there is a desire to buy three houses and five houses and a desire to buy a loan that is 100% the value of the house, and you agree to payments that you cannot make and other such things because it does not matter: today's acquisition will cost more next year.
And the lender feels the same way. It really doesn't matter if it is an unsecured loan or is it - well, do you know what I mean? [...] Because, even if the lenders will then have to pick up the purchase, it will cost more next year. And at some point, this process picks up speed, increases under the influence of price, and the original premise is forgotten, as it happened in 1929.
The Internet has become the same. It was assumed that the Internet will change our lives. But this did not mean that each company would cost $ 50 billion, which was imagined in some kind of avenue.
And price action becomes so important for people that it captures them - it also captures their minds because housing is the largest mono-active, making up about $ 22 trillion of total household income of $ 50-60 trillion in the United States. . Giant asset! This is so clear to the people - he could not understand anything about promotions, he could not understand anything about tulip bulbs, but he understands when it comes to home, and he was eager to buy it in any way and with any funding, and it was possible to spin the situation up to the sky - this created a bubble that we have never seen. "
Warren Buffett
During the interview, he also gave a crystal clear explanation of how bubbles form.
This is an excellent material for anyone interested in an investment or behavioral economy.
The interview came from a recent discharge of documents from the National Archives, which published transcripts, meeting agendas and confidentiality agreements from FCIC. The group was created by Congress after the crisis to study the causes of this event.
')
So, Buffett (our selection):
"... My former boss, Ben Graham, told me one of his observations about 50 years ago; I remember it, and now I saw his confirmation.
He said: "You can get a much more difficult problem in investing, based on a sound premise, than relying on a false one."
If you somehow assume that the moon is made of green cheese or something like that, then it is, at first glance, absurd. If you base yourself on the premise that common stocks are preferable to bonds, you get a deep foundation for a bubble [1929]. People think that stocks become a wonderful investment, and they forget the limitations of the original premise [....]. As a result, after some time, this initial premise, which was a kind of incentive for what turned out to be a bubble, is forgotten, and the price starts to act.
Now we saw the same thing in real estate. Fully sound is the premise that real estate will cost more over time as the dollar becomes cheaper. [...]
And since more than 66% of people want to have their own home and because you can borrow money for it and dream of buying a home, then if you really believe that real estate will be more expensive, you buy a house right away, as the opportunity arises. . And this is a very sensible premise. However, this applies, of course, to real estate sold for something approximately equal to the replacement price, and to a situation with not very much faster inflation.
As a result, based on a sound premise that buying a house this year is a good idea, since it will cost more next year, you are aiming to buy a house; the fact that you will be able to finance this begins to deform after a while, if housing prices rise 10 percent a year and inflation only a couple. Soon the price starts to work - or to some extent the price - and there is a desire to buy three houses and five houses and a desire to buy a loan that is 100% the value of the house, and you agree to payments that you cannot make and other such things because it does not matter: today's acquisition will cost more next year.
And the lender feels the same way. It really doesn't matter if it is an unsecured loan or is it - well, do you know what I mean? [...] Because, even if the lenders will then have to pick up the purchase, it will cost more next year. And at some point, this process picks up speed, increases under the influence of price, and the original premise is forgotten, as it happened in 1929.
The Internet has become the same. It was assumed that the Internet will change our lives. But this did not mean that each company would cost $ 50 billion, which was imagined in some kind of avenue.
And price action becomes so important for people that it captures them - it also captures their minds because housing is the largest mono-active, making up about $ 22 trillion of total household income of $ 50-60 trillion in the United States. . Giant asset! This is so clear to the people - he could not understand anything about promotions, he could not understand anything about tulip bulbs, but he understands when it comes to home, and he was eager to buy it in any way and with any funding, and it was possible to spin the situation up to the sky - this created a bubble that we have never seen. "
Source: https://habr.com/ru/post/299622/
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