Warren Buffett last week said that US stocks “might be a little on the high side now, but they’ve not gone into bubble territory.” But the Oracle of Omaha added the standard caveat that “it’s always easier to identify [bubbles] in retrospect.” Does that mean we should refrain from trying to estimate bubble risk in real time? Perhaps, although the devil’s in the details. How you define and look for bubbles are critical factors. Assuming that we”re willing and able to read the data in a comparatively objective manner, searching for bubbles can be productive. But in order to pass the smell test this process should be part of a healthy and diversified risk-management regimen that unfolds in the context of a relatively objective framework. That’s a fairly high bar, but let’s give it a try, if only as an academic exercise.
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