Learn How To Indentify Asset Bubbles

Asset bubbles are not straightforward to determine if not with the benefit of hindsight, mainly when the bubble was still in the early stage of making, it might be difficult to distinguish between a bubble or a boom with good fundamentals. Investors might not fancy to be cautious with early-stage bubble as it might be the most excellent for them to join the party, but it would be very useful meant for investors to have some idea on how a late-stage bubble would look take pleasure in so that they can discover out of the market on time. As we are now in a very chaotic situation, I thought it might come in handy if there are some ideas to help readers and myself to identify asset bubbles.

1. Asset Prices increase benefit from a rocket

This sounds enjoy a no-brainer, but for certain this is the prerequisite. The fact is level in prosperous time, stock prices rarely go in one direction meant for months, as well as there are always ups as well as downs in the market level in the fastest growing economy. If asset prices are going up for long time, it should be time to be cautious.

2. Flat the general public talks about investing

Investing would not normally be a hot topic on dining table or some drink receptions. But in a time of bubble-blowing, every person is interested in investing, from bankers to salesman, from professionals to students, everybody is talking regarding investing. When you see generous queue outside a bank or brokerage house for an IPO, for example, that is a sign of bubble-blowing.

3. Every investor seems to be winner

Because the market is doing very well, most people in the market seem to be winners. Newspapers will tell a lot of stories on how a housewife become a millionaire, or how a college student gain HK$10m in a simulated stock trading competition. Of course, when the market is only going up, as long as you are not shorting, you are a winner.

4. Level people who did not invest before invest now

If you try to figure out which period of time are there the highest number of first-time investors entering the market, it must be in the time of bubble-blowing. Because the market is doing well, plus any investor seems to carry out well with several wonderful stories of how someone become a millionaire in months, this attracts several novices who wish to make some fast profit from speculating.

5. "This time is many" syndrome

Yale economist Irving Fisher was a bright economist who devised the Fisher hypothesis on interest rate. However, he famously claimed that "Stock prices have reached what looks take pleasure in a permanently high plateau." He lost almost his entire wealth in stock market. Although there are some people have tried to justify his claim, as far as bubble is concerned, this is irrelevant (In fact, if you devour the dividend-discount model to calculate the theoretical share price at 1929 by using dividends paid from 1929 to present, I would not be surprised if that the share price in 1929 before was at least correctly valued or cheap. However the market is not rational, as well as no people can really predict dividend payments to eternity).

The key spot is people, amateur plus professional analysts alike, would try to come up with reasons that the current rise in asset price is not a bubble, rather it is supported by strong fundamentals. You carry out not wish for to look elsewhere but to read the book "This Time is Various" by Carmen Reinhart also Kenneth Rogoff

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