The past year, we have seen speculative stocks and assets soar. Some may be here to stay and other may be what we consider a “bubble”. A bubble is defined as an economic cycle that is characterized by the rapid escalation of market value. This fast inflation is followed by a quick decrease in value.1There is no blueprint for investing in a bubble but we can look at what happened in the past.
Back in the late 1990s, during the dotcom bubble there was a rapid rise in U.S. technology stock valuations. During this period, the Nasdaq index went from 1,000 to 5,000 from 1995 to 2000. Investors who bought near the top during the dot com bubble are still waiting to break even on Intel and many other stocks.
Intel is an example of one of many stocks that went through rapid growth in price and then suffered a severe decline. Some investments became worthless, and some lost substantial value and never recovered.
Currently, I don’t think the overall market is in a bubble, but it’s surrounded by them. Is today’s bubble in Tesla, Crypto or others? No one knows for sure. But what we do know is prices will not go parabolic forever. Bubbles are driven by human nature and it’s impossible to predict when it will turn. Could these assets continue to rise substantially short term? Yes, but they could also lose their value just as quick. Always chasing a quick return is not an investment strategy but instead gambling.
Sources / Disclaimers:
Source for drawdown charts: YCharts
Bubble definition1
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