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.
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.