Cliff Asness: Definition Of A Bubble: ‘No Reasonable Future Outcome Can Justify These Current Prices’

In this interview with Carson Group, Cliff Asness Cliff Asness explains why he’s annoyed by the overuse of the word “bubble” in finance. He defines a bubble as a situation where no reasonable future outcome can justify current prices. Here’s an excerpt from the interview:

Asness: I wrote a whole piece in the Financial Analyst Journal. I know you’ve read this because many of your questions were taken from this.

I wrote a piece on my top 10 things that annoy me in finance.

This is very hard to call down to because I have a very long list. One of them was overuse of the word bubble. If you watch business TV, which I don’t generally recommend but if you do, somebody will come on and talk about a bubble and a single stock they don’t like.

There’s a big difference in saying we think this company is overvalued and bubble.

My definition, which I made up I admit but I think it’s a pretty good working one is, we have tried very hard to come up with any assumptions that are within the ballpark of reasonable based on either forward-looking economics or long-term historical data, that could justify these current prices.

And if the answer is no, and that should be very rare, because while I’m not a perfect efficient marketer I don’t think they’re that easy to beat either.

And when they’re easy to beat they’ve been excruciating for a while.

So that’s my definition of a bubble. I think I’ve seen two in my career. I think the dotcom bubble, I’m calling it the dotcom bubble so I’m kind of giving it away.

And I think at least by late 2020 post-covid that cheap versus expensive stocks were depending on the way you sign it in a positive or a negative bubble.

I don’t think there was any way those prices could be justified by any subsequent results that were within the realm of reason.

You can watch the entire interview here: