Centuries of financial crises and speculative contagions seem to be enough evidence for me.
If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically.
Value investors buy assets at a discount to their intrinsic value and they derive that intrinsic value using conservative assumptions on factors such as liquidation value and future cash flows.
If majority of market participants were value investors you would not have had the Dutch Tulip Mania, South Sea Bubble, or more recently the Dot Com Bubble / pre-GFC highs reached in 2006/2007.
If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically
I'd like to see that quantified.
If 60% of investors were value investors and 40% were speculators, would we still get bubbles? I'm thinking yes.
In reality, most people are in the middle. Looking for value, but still mortal, fallible and susceptible to being persuaded that the flavour of the month really is the next big thing.
Not really. Bubbles can easily occur in the absence of credit. I'm not sure how many people were borrowing money in the south seas or tulip bubbles, but probably not that many. Even in the first dot-com bubble (how quaint it sounds to say it now) most of the investing was being done by folks who had money rather than folks who were borrowing it.
The recent housing bubble, on the other hand, yes.
The most common explanation given to economic students is theoretical and relevant to basic rationality:
* investors who are speculative have no interest to become long-term focused, while
* a long-term focused investor who, say, owns a great but over-priced stock has interest in selling it expecting to buy it back afterwards, and then bring it to its long-term value;
* similarly, a long-term investor who sees two company would rationally prefer a average but underpriced stock over a great, but already high one if he expects a higher value.
Because short term always precedes long, considering speculation is rational for either type of investor.
You can check chapter 10 and 11 of Keynes' General Theory… if you want a very detailed personal account of those.(Keynes was the best speculator of his time, and make Cambridge King's College immensely rich doing so.)
