A bubble formation is technically speaking a concept in the market where more and more people are entering and participating in a phenomenon that gets bigger.
It started all the way from the first few batches that enter into the phenomenon and made extraordinary gains from sitting in a pot of gold, then made into the headline news in the media so more people can join in the party. This phenomenon made such a huge amount of gains in a short amount of time such that it will look stupid on people who doesn’t participate in it.
Everyone congratulates one another and that’s when the “wealth effect” starts coming in, a concept which my fellow blogger STE just wrote it here. Essentially, it is a prelude that when the value of the assets you are holding increases in price and you are sitting on a comfortable gains, this security about wealth is being translated into spending higher because earning money is that… simple.
Charles Mackay, one of the famous journalist who wrote on the book “Extraordinary Popular Delusions and The Madness of Crowds” states that bubble spotting isn’t as simple as it appears. As investors, you should always guard against the popular assertions made by high profile analysts or pundits that claim they can detect bubbles and exit before the bubble bursts.
Take a look from one of the excerpts from the everly popular figure Jim Rogers on his claims on the market each year.
The point he is making might be right in theory but for as long as the bubble is still forming and the party still lasts, it will live to see another day.
We’ve seen the US market expanding for 9 consecutive years since the great financial crisis and valuations are within top 3 highest since the Great Depression in 1929. We’ve also seen byptocurrency like Bitcoin and Etherium gaining exponentially upwards since the last couple of years. The delusional positioning in this instance is to avoid totally and wait for the crash to happen or participate in the momentum and make your way out before the party is over.
There isn’t a definite answer to this and only with hindsight we can tell our children how easy it is to predict and see that happening.
The great value investor Benjamin Graham once mentioned that investors should always look to portfolio balancing as a measure to his or her own psychological play on the market. He added that investors should never have less than 25% or more than 75% of their money in an equity market. The room for that error of +-25% top and bottom is to account for the investor’s own judgement when the market level has become increasingly dangerous or opportunist. But because no one can ever predict anything so accurately, you shouldn’t go one extreme and do a 100% or 0% binomial decision.
Now, as investors, have you worked out a perfect plan for yourself?
Thanks for reading.
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