1) INTRODUCTION:
François Doyon La Rochelle:
You’re listening to Capital Topics, episode #80!
This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.
Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.
In this episode, we discuss financial market bubbles history and perspectives.
Enjoy!
2) FINANCIAL BUBBLES – INVESTING BEYOND THE FEAR OF BUBBLES:
François Doyon La Rochelle:
I will start this off for our Listeners.
Our recent Podcasts have addressed the History of Market Cycles, long-term capital Market Returns, and Asset Allocation, reviewing the weight of US Equities vs International. We addressed how recent Capital Market returns have significantly exceeded Long Term Expected Returns, which may lead to lower future returns.
The next related Topic is about Valuation because the markets are now at all-time highs. The barrage of negative headlines is reaching a crescendo – this is September, historically the worst month for markets. We are seeing headlines flat out stating we are in a bubble.
At the end of the day, what is critical for Investors is how they will manage their emotions in this sea of crystal ball forecasting. We have been consistent in telling our listeners that it’s imperative they tune out the noise in the financial media. Although it is easier said than done.
This leads us to today’s topic, which is about the history of Financial Market Bubbles, History, and perspectives. So, James, where would you like to start?
James Parkyn:
Thank you for that Introduction, François. This is a timely Topic. Recently, I read an article in the WSJ that was written by a renowned finance Professor, William Goetzmann at Yale University, entitled “Financial Bubbles Happen Less Often Than You Think”. I feel that sharing his research will be very useful for Listeners as it is a terrific message to counter all the negative noise.
François Doyon La Rochelle:
For our Listeners, William Goetzmann is Professor of Finance and Management Studies at the Yale School of Management and a research associate of the National Bureau of Economic Research. In 2018, he received the James R. Vertin Award from the Chartered Financial Analysts Institute Research Foundation "for a body of research notable for its relevance and enduring value to investment professionals". So, James, what has Professor Goetzmann’s research found about financial market bubbles?
James Parkyn:
François , first, I think we should clarify for our Listeners what a bubble is. Professor Goetzmann’s research confirms the term “bubble” was first referenced to a financial crisis originating 300 years ago with the 1711–1720 British South Sea Bubble. From this crisis, financial market bubbles came to signify that the prices of stocks were inflated and fragile based on nothing but air, and vulnerable to a sudden burst.
I quote from his WSJ article: “In my research on more than a century of global stock market returns, I looked for how often bubbles occur. I defined them as a rapid doubling of stock prices followed by a crash that gave back all or more of the gains over the next one year or the next five years. Looking at all of those possible five-year periods, bubbles only happened in less than one-half of 1% of them.” So very rare.
François Doyon La Rochelle:
James, that has huge significance for long-term investors. Professor Goetzmann writes in his research paper titled “Bubble investing: Learning from history” and I quote, “The broad awareness of financial history seems to correlate with extreme market events. For example, the closest comparison to the dot-com bubble of the 1990s was the run-up in US stock prices in the 1920s. During the 2008 financial crisis, the financial press frequently referenced past bubbles—periods of market euphoria followed by sharp price declines.” He is alluding to how the financial media often refer to these extreme market events during new periods of extreme market volatility. If you ask most people about the Capital Markets' history, they all mention these periods of extreme negative volatility.
James Parkyn:
François, I believe most Investors when they think of a financial bubble remember the dotcom period of the late 1990s into early 2000. Many high-flying tech stocks in the NASDAQ Index with little or no revenues reached billion-dollar valuations. Investors in classic FOMO recency bias mindset believed in overly optimistic projections about the scale and sustainability of growth in dotcom stocks. Many headlines touted the belief that intrinsic valuation was no longer relevant when investing.
I quote Professor Goetzmann in his WSJ article: “When the dot-com bubble burst in March 2000, the Nasdaq fell nearly 78% from its peak. Many of the era’s highest fliers plunged more than 90%, and vast swaths of dotcoms disappeared”.
François Doyon La Rochelle:
I would add that bubbles have historically appeared in most asset classes, including equities in the 1920s, commodities with the Uranium bubble, and in real estate, most recently with US housing in the 2000s. A key point is that bubbles usually form because of either excessive monetary liquidity in the financial system, and/or changes in investor psychology.
James Parkyn:
I would add that Professor Goetzmann’s research demonstrates that bubbles only happened very rarely. In his WSJ article, he states: “Bubbles loom large in our historical understanding of the financial markets. They are memorable. They are colorful. They are scary. They raise questions about investor psychology and the madness of crowds. In good times, we worry if we’re going to be caught in the next big bubble.” And that, in my opinion, is where we are now.
But from his WSJ article, I quote his core message: “one of the biggest mistakes an investor can make is to rely on a handful of colorful historical episodes and ignore the long intervals in between: the sequence of quiet gains that stock markets have made over the decades and centuries they have existed. A statistician will tell you that the smaller your sample of data, the less reliable it is for forecasting—particularly when the sample is chosen particularly because it is interesting.”
François Doyon La Rochelle:
James, a British financial journalist and author, Robin Powell, has also recently written an article about Professor Goetzmann’s research. I would like to share a quote form his article entitled “The financial bubble delusion: why crash fears cost investors more than crashes themselves” and I quote: “The most dangerous financial advice sounds perfectly sensible: "Don't lose money." Generations of investors have followed this wisdom religiously, keeping their savings safe in cash and bonds while waiting for the "inevitable" market crash. They've successfully avoided every bubble, every correction, every moment of volatility. They've also missed 300 years of wealth creation, making safety the riskiest strategy of all.”
James Parkyn:
Well, François, I think that’s very well said. The research findings by Professor Goetzmann, who examined market data since the 1700s across 21 countries, challenge everything investors think they know about crash probability and market timing. His surveys in collaboration with Nobel laureate Robert Shiller consistently show investors estimate a 10% to 20% probability of catastrophic market collapse within any six months. Yet as we quoted from his WSJ article, when Goetzmann analyzed actual market behavior from 1900 to 2014, examining every possible five-year window across global stock markets, financial bubbles occurred in less than half of one percent of these periods.
François Doyon La Rochelle:
Robin Powell has an interesting take on this. I quote him again: “This perception gap isn't merely academic curiosity — it represents the difference between capital appreciation and wealth destruction for millions of investors. Like a smoke alarm that sounds every time you make toast, our crash detection systems have become so sensitive to false alarms that we abandon the kitchen entirely, missing decades of perfectly good meals while obsessing over the rare occasions when something actually burns.”
James Parkyn:
François, in our Podcast # 75, covered the UBS Global Returns Yearbook using Professors Dimson March, and Staunton's data, which started in 1900. A long-term U.S. investor who stuck with a diversified stock portfolio in global markets earned returns of about 9.5% a year. And François, this happened despite all the historical extreme events such as the crash of 1929, the Great Depression, the single-day loss of more than 20% on the Dow and S&P in 1987, the bursting of the dotcom bubble, the Global Financial Crisis 2008-2009, or the Covid meltdown.
François Doyon La Rochelle:
Even the most dramatic single-day crashes prove remarkably rare. Since 1887, the Dow Jones Industrial Average has fallen more than 10% in a single session exactly four times. Four days out of roughly 34,000 trading sessions. The market's normal tendency toward gradual investment growth overwhelmingly dominates its occasional spectacular failures.
James Parkyn:
François, for me, the 1987 “crash” was my first real exposure to extreme market volatility. I remember vividly witnessing the biggest large-cap Canadian stocks like Bell trading with bid-ask spreads of over 3 dollars!!
François Doyon La Rochelle:
James, that’s wild! Today, the spread on a normal trading day is a couple of pennies. So why do you think Investors are prone to believe bubbles or crashes are much more likely to happen than they actually do, according to the historical data?
James Parkyn:
François, there is a recent research paper published by Professor Goetzmann entitled “Crash Narratives”. His latest research uses artificial intelligence to analyze media content to see how the tone and messaging in financial publications may influence investors during periods of extreme market volatility. His findings show how media coverage distorts the probabilities of extreme events. Robin Powell speaks about this in his article, and I quote, “Newspapers don't run headlines about "Market Rises Modestly for 12th Consecutive Session" or "Local Investor's Portfolio Compounds Quietly at 8% Annual Rate." Drama sells papers; compound interest doesn't. This creates an availability bias where memorable crashes feel far more probable than boring wealth creation, despite historical evidence showing the opposite.”
François Doyon La Rochelle:
James, humans are simply not wired to process market history data. Behavioral economics highlights that investors are much more afraid of losses than emotionally attracted to gains. AS Robin Powell states, “Humans evolved to survive immediate physical threats, not evaluate statistical probabilities over decades. A 0.5% catastrophe frequency feels meaningless compared to the visceral fear generated by vivid crash footage from 1929 or 2008. Our brains treat these rare but memorable events as representative samples, despite their statistical insignificance.”
James Parkyn:
To me, François, Professor Goetzmann’s research provides some key insights about the powerful economic impacts that come from the innovations that often occur during bubbles. These historical speculative periods often coincide with genuine economic transformation. The challenge isn't identifying innovation or growth — it's determining which specific companies will survive and thrive. This requires the kind of stock picking that defeats even the most sophisticated investors.
As we said earlier, the dotcom crash destroyed trillions in speculative paper wealth while preserving the companies that would ultimately dominate the next two decades. Amazon, Alphabet (Google), Apple, Microsoft, NVIDIA, and other big tech stocks peaked in late 1999 into March 2000. They then crashed, and this led to a lost decade in US Stocks. Today, these stocks are the mega-cap winners of the PC revolution that started in the 1980s.
François Doyon La Rochelle:
Similarly, today’s markets are driven by everything that involves artificial intelligence. While individual AI companies may turn out to be a bust, the underlying technological shift will likely be transformational. Investors fleeing entire sectors due to bubble concerns risk missing a legitimate wealth creation opportunity.
James Parkyn:
François, what I know from many years of experience is that the true devastation from crash anxiety emerges not during crashes themselves, but in the periods when investors sit on the sidelines. Professor Goetzmann’s research shows that boom periods were almost twice as likely to lead to further gains as devastating crashes.
He states that traditional financial theory suggests markets should become more dangerous as prices rise, yet historical evidence complicates this intuitive relationship. While catastrophe probability does increase statistically during boom periods, it remains remarkably low in absolute terms. Even after markets double, the five-year crash probability rises from virtually zero to roughly 15%. This comes out to a bit less than a one in six chance.
François Doyon La Rochelle:
The mathematics of compound growth makes these timing errors particularly costly. We have highlighted this often. Dimensional has some great charts on trying to time the markets. Robin Powell highlights in his article that “Missing just the 20 best trading days over a 20-year period typically reduces total returns by approximately 50%. Since many of these best days occur during the volatile recovery phases following crashes”.
James Parkyn:
François, Crash-avoidance strategies often guarantee missing the very rebounds that create long-term prosperity. Time in the market matters more than timing the market. Timing involves two decisions: when to get out (if you are invested and when to get back in. You must get both right. This creates a fascinating paradox for investors. Boom periods simultaneously represent both peak opportunity and peak anxiety. Markets that may have doubled face higher crash risks than normal periods, yet they're also more likely to double than to crash.
François Doyon La Rochelle:
James, this leads to focusing on Investor behavior. The emotional challenge lies in maintaining perspective while surrounded by intense negative media coverage. Again, I would like to share a great quote from Robin Powell: “Professional behavioral research reveals why this paradox torments investors. Rising prices create cognitive dissonance — we want to participate in prosperity creation, yet everything feels "too expensive" compared to historical norms. This discomfort intensifies as booms continue, making early exit feel increasingly prudent despite evidence suggesting otherwise. The solution requires understanding probability versus certainty. A 15% crash probability means an 85% probability of avoiding crashes. No rational person would refuse a game offering 85% odds of substantial gain versus 15% odds of temporary loss, yet this describes exactly how investors behave during boom periods.”
James Parkyn:
As our regular listeners know, François, we love to share Warren Buffett quotes on our Podcast. But today, François I have one from his mentor Benjamin Graham. Graham, in his classic book The Intelligent Investor stated: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
This insight suggests that catastrophe anxiety will challenge our long-term Investor Mindset and ultimately reduce our portfolio returns.
François Doyon La Rochelle:
Financial bubbles grip our imagination, but Professor Goetzmann’s research spanning 300 years reveals they are exceptionally rare events. Investors influenced by the financial media are scared into market timing out of fear of losing significant wealth. Robin Powell says it well: “The real wealth destroyer isn't market crashes — it's the behavior they inspire in investors.” Jason Zweig, in his September 9th, 2025, blog The Intelligent Investor says, “Our emotions don’t forecast what will happen, they post cast what did happen.”
James Parkyn:
That’s very well said, I love those quotes. But interestingly, François, what this research on Financial Market bubbles teaches us is that the main fear we have of a catastrophic loss due to market crashes is what really pushes us into bad investing behaviour and to succumb to market timing. As our listeners know, we harp on this in most of our Podcasts.
My final quote is from Professor Goetzmann’s WSJ article, he states, “Is it possible to avoid bubbles? Guessing in real time whether a stock-market boom will collapse is notoriously difficult”.
François Doyon La Rochelle:
So, let’s conclude for our Listeners. A successful investment experience is based on consistently making good investment decisions. This brings us back to James on the importance of a long-term perspective and with it an appreciation of the laws of risk and return. I recommend that our listeners always consider their long-term goals, their risk profile, their ability to take risks, and their time horizon when building their portfolios.
I hope our Listeners have found our discussion about Financial Market Bubbles useful in helping them make smart decisions with their long-term money. Investors must always come back to the perspective of risk and reward, and the importance of diversification and asset allocation. This, as our Regular Listeners know, is core to our Investment Philosophy.
3) CONCLUSION
François Doyon La Rochelle:
Thank you, James Parkyn for sharing your thoughts and expertise again today.
James Parkyn:
You are welcome, François.
François Doyon La Rochelle:
That’s it for episode #80 of Capital Topics!
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Again, thank you for tuning in and please join us for our next episode to be released on October 29th. In the meantime, make sure to consult the Capital Topics website for our latest blog posts.
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