Why do bubbles occur? Bubbles happen over time because of human irrationality. People as a whole tend to get excited and swayed by the madness of the crowd. When quotes such as “this time it’s different”, it should definitely throw up yellow warning flags.
Bubbles are a product of human overreaction.
Intially the bubble occurs because the idea had fundamental and logical reasons why it should go up. However the general public may see the asset as too risky. This is when the asset starts making very quick returns in a short time period.
Then the media starts paying attention to the move, you hear about it on tv, in the newspapers, the asset continues running upward without looking down. Now the general public is thinking about investing it. It’s no longer “risky” but it is now a bit “pricey” but absolutely worth it because “so and so is in it”.
Then you have everyone who largely missed the entire rally jump in. It could be your neighbor, coworker, family friend or even dear old grandma.
How do you know if it’s a bubble? Doctors, lawyers, rappers start investing in it.
Everyone is watching it, discussing it, and you probably hold it. But it is most likely going nowhere.
Likely bubbles:
Gold ?
Paulson the one hit wonder who made tens of billions in the subprime crisis started a gold fund. First month it opened, down 14%.
Oil ?
Stocks?
