07-11-06 - 1


I was thinking today that anyone buying a house in CA right now is foolish. The only reason they can get away with these insane prices is because people are willing to pay it. The reason people will pay it is they see it partly as an investment that will appreciate. It's a standard pyramid scheme / bull market type of thing. Then of course I realized I've been thinking that for the past few years and I've been wrong so far.

The funny thing I realized is that in bubble markets, like the current housing market (especially in CA), and the internet stock boom, is almost nobody is actually smart & rational about it. You have the "irrationally exhuberant" people who think it's just going to keep going up. They might recognize it's a bubble, but they think it won't pop badly, maybe it will just plateau. They rationalize all sorts of ridiculous reasons why the valuations should really be so high. On the other hand you have the people who see that it is indeed a bubble, but irrationally think that that's a good reason to stay out of the market. Not so, bubbles are a great time to ride the market and take a huge profit. Very few people actually identify the bubble and try to ride it smartly.

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old rants