Bubble-spotting

One of the basic corollaries of economics — just downstream from the theories — is that insiders are never looking to recruit others: fewer pieces of the pie mean bigger pieces of the pie. This suggests that when you do get offers, you should be very suspicious. An example of how this works in real life:

[I]n the last 6 months I have started hearing radio commercials again urging folks to get into the house-flipping business and make their fortune. Whenever institutions start selling investments to you, the average Joe, rather than just investing themselves, that should be taken as a signal that we are approaching a top. About 12-18 months before oil prices tanked, I started getting flooded with spam calls at work trying to sell me various sorts of oil exploration investments.

To explain the dynamic at work:

In 2010, when house prices were low and some were going for a song in foreclosure, there were no house flipping commercials on radio. That is because Blackstone and other major institutions were too busy buying them up. Now that these companies see less value, you are hearing house flipping commercials. You know that guy who has a book with his fool-proof method for making a fortune? So why is he wasting his time selling books for $2 a copy in royalties rather than following his method?

Unless, of course, his method involves extracting dollars from rubes in two-dollar increments.





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