Episode summary
He Invested Through Five Bubbles | Andy Constan on What Works — and What Always Breaks
Excess Returns
· · 56 min · Guests: Andy Constan
Summary
Andy Constan argues that bubble regimes are distinct because they are trending, low-volatility, and driven by human behavior that encourages investors to take the most risk at the worst time. He says bubbles begin with a real change, move through escalation, and then enter a parabolic phase; the key point is that calling something a bubble is not the same as calling the top. The change he points to in the current cycle is the post-2022 easing backdrop combined with the ChatGPT and AI inflection point, followed by escalating moves as markets became more speculative.
For long-only investors, his main advice is to know whether they are vulnerable to FOMO or buyer’s regret and to keep risk targets tighter in a bubble. He says low volatility tempts people to lever up, buy the hottest names, or rebalance less, but that the right response is to cap exposure and avoid letting a winning portfolio drift too far. He also argues that stocks are only one slice of the market portfolio, and that bonds, gold, and commodities can provide diversification and better risk control than stocks-only portfolios.
For alpha investors, Andy says bubble regimes often degrade most strategies except momentum, while mean reversion and many relative-value trades can work much worse. He expects more alpha on the other side of the bubble in places where contagion spreads after the pop, but he stresses that the top cannot be timed. The practical edge, in his view, is preparing for where stress will show up after the bubble ends.
Key takeaways
- Andy Constan says bubble regimes are defined by trend and low volatility, which push investors to lever up at exactly the wrong time.
- He says calling something a bubble is not the same as calling the top; bubbles are only obvious in retrospect after they pop.
- Constan says long-only investors should lower maximum exposure during a bubble and let winners run less aggressively than normal.
- He argues that stocks-only portfolios are less diversified than the market portfolio and that bonds, gold, and commodities can improve risk-adjusted returns.
- Constan says momentum tends to work better than mean reversion in bubbles, while many alpha strategies should have lower return expectations.
- He says the best opportunity after a bubble is not shorting the top, but preparing for where contagion will hit next.
Notable quotes
“The unique thing about a bubble regime as I mentioned it's trending and it's low volume which makes investors believe that their portfolio is very very low risk”
“This is not normal and that's what differentiates it. And so I think we're in that. Could be early, could be mid, could be late”
“bubbles bring out the worst in you, and you should know what you're capable of”
“Owning stocks is the least diversified way, and there are many better ways”
How the episode opens
The unique thing about a bubble regime as I mentioned it's trending and it's low volume which makes investors believe that their portfolio is very very low risk and the mistake that they make is they lever up at the at the absolute time when they shouldn't be and that inflates the bubble. What I've noticed in looking at bubble regimes is strategies that work most of the time don't work as well in bubble regimes except for one. There's lots of alpha on the other side for the people that are not puking.
If you are preparing for the other side, not not shorting, trying to pick the top, but thinking where will the contagions be? Welcome to episode two of First Principles with Andy Constant. Andy, nice to see you again.
Last week we sat down to talk to you about the writing that you're doing on your Substack and on Dampspring to your clients and your thoughts on sort of bubbles and the stages of um bubbles and how investors should be thinking about that the way that you think about it, the experiences that you've been through in your investing career. And so where we I think left off in the discussion was you know what now if you when you're thinking about a bubble or a bubble regime which we'll talk about you know how do you react to that and how do how do you think about it and how does one you know how does that inform someone's investment strategy portfolio positioning asset allocation so that's really going to be I think the heart of what we're going to discuss today but I thought maybe where we could start is for those that didn't listen to that episode which we certainly encourage you to do that or go and read Andy's research.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bubble regimes
- portfolio construction
- risk management
- alpha strategies
- momentum vs mean reversion
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Excess Returns
-
We Asked Fidelity’s Director of Global Macro Who Wins If AI Spending Slows -
An AI Bubble Could Hit Stocks. Inflation Could Hit Bonds. How Do You Diversify and Keep Both? -
Tech Is Priced for a Boom. 86% of the Economy Grew 0.7%. What If AI Slows? -
Tech Is the Cheapest Since 2022. Walmart Is 46 Times Earnings. Where Is the Bubble? -
This $1.5 Trillion Manager Expects More Fed Hikes. So Why Is He Still Bullish? -
AI Stocks Cracked. Margins Could Be Peaking. So Why Is a Liquidity Expert Watching the Debt Wall?
Excess Returns, this episode and its artwork belong to Excess Returns. Octagon is not affiliated with the show; this page is an independent summary.
