In light of the recent exceptional volatility in some investment opportunities, it might be worth remembering that bubbles have raised and dashed the hopes of speculators for centuries (see our blog Tulip Mania – A Reminder).
One of my favorites is the great Beanie Baby bubble of the late ‘90s. With no big-box distribution or advertising, consumer demand for a stuffed toy, typically retailing for about $5.00, became a sought after collectible and traded for hundreds of dollars, with a few even reaching $5,000 on eBay, before the bubble imploded in 1999.
Bubbles are difficult to identify, except in hindsight. Sometimes, what looks like a bubble is actually the early stages of a misunderstood opportunity. Investors should remain wary of possible bubbles and act accordingly. Usually, stepping back is the best strategy when you don’t really understand what you are thinking of buying. If you feel compelled to participate, use cash and limit your commitment to an amount that you can afford to lose. Please, do not use borrowed money. The potential for uncontrolled losses is too great.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA