Like most articles about bubblenomics, this one misses the real point.
When the financial system becomes dominated by bubbles, it is unable to allocate capital effectively. You get a "lost generation" of businesses which could have used capital more profitably than the ones who did get funded.
Like anyone else who shirks their job, capitalists who participate in bubbles ultimately won't get paid for the labor that they're not doing.
Worse than that, it's quite possible that more financial capital exists than there is actual demand for investment. In that case, capital should be rerouted towards taxes or higher wages for workers: perhaps we'd be better off with a lower national debt and if Joe Sixpack is better paid, businesses can compete to offer him new and better products and services, creating new opportunities for businesses to succeed and wealth to "trickle up".
Situations where "If you have to ask, the answer is yes" are truly a horrible thing. A lot of people forget to trust their gut instincts and try to ride something that is ultimately unridable.
So what's a guy to do in a bubble anyway? Starting a company sure sounds like it might work out pretty well, but the problem is the bubble will likely burst before you manage to bail. Going about your everyday life like nothing's happening will likely leave you with feelings similar to coding away in a basement with a beautiful day just out the window ...
You've hit on the real problem with bubble analysis: for most people most of the time, knowing we're in a bubble doesn't actually help you decide what to do about it, since we don't know when the bubble will burst.
It's a great idea to invest during the frothy phase of a bubble - as long as you cash out before the crash. The trick - the risk - is predicting when that's going to happen.
I realized we were in a housing bubble back in 2004, but aside from sighing when friends bought houses as "investment vehicles", I wasn't able to put my realization to much use. I was right about what was going to happen but dead wrong about when: the bubble ended up inflating for another four years, time during which I could have cheerfully flipped properties at great profit had I been able to know in advance when the market was going to peak.
Back in the late 1990s, I remember watching people buy Nortel shares at $100+ per share and thinking they were absolutely nuts - but some of those people sold at the right time and still came out ahead (while others saw their investments collapse to pennies on the dollar).
In both cases, knowing we were in a bubble gave me no competitive advantage.
Anybody ever tried applying the Kelly Criterion to investing in a bubble? That is, http://en.wikipedia.org/wiki/Kelly_criterion with the "fraction of bankroll" being the amount of your portfolio invested in the bubble? That way, you could rebalance regularly to avoid subjecting an undue amount of your retirement fund to the riskiest parts of the market, but still reap some of the benefits.
Kelly criterion has nothing to do with bubbles (it says nothing about timings, and the main challenge of bubbles is timing). Also, Kelly criterion uses odds received and probability of winning, and you don't have anything like that in the stock market, bubble or no bubble.
The Kelly Criterion is for making repeated bets on similar offered odds and probability of winning. Admittedly, it's harder to calculate your probability of winning in a stock market bubble than it is at the roulette wheel; but you can still do your best and use that number.
If the rest wasn't clear, your offered odds are the delta in stock price minus the transaction costs.
The Bubble is very narrow in scope. You can "start a company" while being totally immune to the Bubble.
For example: there isn't a bubble for making & selling value-producing tools & services to small business. Just like there's no "bubble" in learning a valuable and useful trade/skill, regardless of how much the lottery is currently going for.
Bubbles are almost always about outsized rewards -- rewards, in other words, that you wouldn't get in a normal, non-Bubble situation. That means overvaluation (of one type or another - don't mean just company prices). On the other hand, being able to demonstrate how your product creates more value than it costs for the customer, a customer who is historically willing to pay for valuable products/services... no Bubble, or really any trend at all, is necessary for that.
(While value-producing services DO go through Bubbles -- e.g. when people/companies jump on a bandwagon for theoretically valuable services that aren't actually going to create value for THEM -- you can almost always still work in that industry and CHOOSE to not participate in the Bubble behavior, e.g. overpricing, overstaffing, overcommitting, serving customers who "want it" but who will not actually see a valuable return in their case, etc.)
Bubbles are, in a lot of ways, like lotteries. Only in this case, it's not REALLY random chance (not entirely)... if you are clever and well-versed in the industry, you already know 1 to 3 digits of the winning number. So it seems like you have a great chance to "win" an outsized reward for yourself. However, you still don't have the whole picture.
When you look at the averages, and the history of bubbles, you know many somebodies are going to get rich and a few somebodies are going to get ridiculously rich. But the chance that one of them will be you is still low. You're still better off in the long run investing in valuable skills, and creating/selling valuable products.
This is essentially the type of approach that Nassim Taleb ("The Black Swan") advocates.
Of course, all of this only applies if lasting livelihood/wealth is the end result you're after. If what you really want is the thrill of the chase, by all means do the Bubble thing.
The answer to your concerns about riding the bubble is not to ride it. Momentum investing has always been riskier than growth investing. There are no Momentum Warren Buffets.
However, at the moment, VC is obsessed with Momentum, and that's really the point of the post. That will change eventually.
From the point of view of investors and entrepreneurs looking to cash out before the crash, I agree that riding the bubble is risky business. However for entrepreneurs with a solid business plan that involves long term revenues and growth, the business can be largely immune to bubble vagaries while still being able to take advantage of readily available investment capital during a bubble.
When the financial system becomes dominated by bubbles, it is unable to allocate capital effectively. You get a "lost generation" of businesses which could have used capital more profitably than the ones who did get funded.
Like anyone else who shirks their job, capitalists who participate in bubbles ultimately won't get paid for the labor that they're not doing.
Worse than that, it's quite possible that more financial capital exists than there is actual demand for investment. In that case, capital should be rerouted towards taxes or higher wages for workers: perhaps we'd be better off with a lower national debt and if Joe Sixpack is better paid, businesses can compete to offer him new and better products and services, creating new opportunities for businesses to succeed and wealth to "trickle up".