Basic Finance

A Note to the Bubble-Phobes

I don't think it is as hard to spot bubbles as you imply it is. I'm not an economist nor am I an active investor, yet I seem to remember a very basic idea in an introductory text on corporate finance: that an asset should be valued as the sum of all expected future cash flows adjusted to net present value. Anyone who looked at what the implied rent would need to be to justify house prices two years ago would have concluded that houses were overpriced. Same with the tech bubble. If you thought about what magnatude of future profits would be needed to support the valuation of the stock market, you would have known there was a problem.