It's based in action upon a belief rather than on fundamentals.
Now one might say, "Well, it's very simple to avoid bubbles, by simply avoiding speculation on unsupported belief."
Unfortunately that's not a valid method, because investment always involves prediction of the future performance of an enterprise or its stock. What's worse is that one big prediction, that is a purchase or sale, or even the fluttering of flags, often leads investors to buy or sell. If it is easy to make transactions then some people will be enticed into the market even though they do not belong there, especially if they see others making what seem to be immense fortunes.
The only way to avoid market difficulties, including bubbles, is to avoid the market. In my own business I just made an investment in new stock. What kind of stock was that? Horses. I just bought two more horses. Will that turn out to be a bubble? Hardly, but it could be a bad investment if I look out the window at dawn and find they have died. Right now it's too dark to see. If events go as I thought, however, they'll actually make me money as I put them to work.
If all my neighbours saw my apparent success in buying two horses, and decided to get in on the supposed profits, and went and bought 200 horses each before the price skyrocketed, that would be a bubble, based on unrealistic expectations. It would be more of a bubble if they inspired thousands of others to buy horses. Suddenly, though, the market would collapse, and nobody could afford to feed the useless horses. Disposal of all those extra horses would be the most difficult part of the process, even worse than trying to sell an overvalued house or $300 million worth of defunct certificates in Global Lunar Hydrogen Mines, Inc. You can burn the certificates or the house. You have to slaughter the horses.
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greed causes stock prices (or anything else) to rise well over what its really worth, cos people rush to cash in on the rising prices ignoring the real value of what it is they are buying
(that is- if you think you are going to be able to sell something for 2x whatt you paid, do you really care if it aint really worth the price you paid in the 1st place?)
Course - people rushing in to buy causes the price to increase even higher, fueling the belief that you cant go wrong by buying cos there is always somebody willing to buy from you
The market then runs out of people willing/able to pay the prices and people in the market realise they have paid well over the real value of what they have bought
Fear then takes over and they try to sell whatever they have bought before other people realise the same thing and also try to sell
Panic then sets in as people try to sell before the falling prices go lower than they paid, and they will lose money
First , you have to copy others and only make a decision if someone has made it before you.
Second, regularly chant the losers` mantra " Everybody does it ". This should be your excuse for doing anything and everything.
Thirdly, you have to believe that prices , income and profits can only go up.
It also helps to be completely gullible.
You can liken it to a balloon. You blow the first air into it and nothing much appears to happen, then you have a phase of rapid expansion. Then the growth appears to slow as the balloon is more or less full of air. Then it bursts!
What's starts and ends a bubble?
