Bubbles have one thing in common; they are going to burst

On March 6, 2000, Larry Summers and Alan Greenspan and many of the senior executives actually waxed poetic about the productivity gains, the technologies, the confluence of our capital markets and great new technological advances, and the fact that it meant great things for our future.

Four days after that March 6, 2000 gathering, on March 10, the bubble burst and the game was over. All had changed.

It all seemed very real at the time, and the senior people in government were getting their information from the sources that had proved the most valuable and trustworthy in the past for all of us: real economic data generated by consumers and corporations, as well as the very best information that the executives running those corporations could give them. We all had seen the same things, and we all had believed.

"Trying to understand is like straining through muddy water. Be still and allow the mud to settle." Lao-Tzu

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The lessons from this bubble are important for 3 reasons.

1. First, there is the unlikely possibility that we may encounter another stock market bubble in our investing lifetime. One per lifetime seems the 'rule', but we cannot rule out anything completely.
2. Second, we do have small bubbles in the market (smaller than in 1929 and 2000) periodically. These include the one caused by a mania in blue chips (called the "Nifty Fifty") from the late 1960s into early 1973, a moderate technology stock bubble in 1983, and the overvaluation in the market before the 1987 stock market "crash."
3. Third and most important, bubbles occur in INDIVIDUAL STOCKS fairly frequently.

We have all heard the term bubble and also the term mania used over the past few years very, very frequently - when people have talked about possible bubbles:

• in real estate or housing,
• in financial instruments in foreign countries, and
• at times even in the Chinese economy,

which has had some startling growth numbers that are far above anything seen before.

Bubbles, like those from bubble gum or soap, come in all different sizes, but they all have one thing in common with each other, including the gum and the soap bubbles; they are going to burst. They are unsustainable because they are not built on enough real substance to support themselves. Thus, many bubbles develop from a mania. A mania is simply something that is more emotional than tangible or rational, so it can be thought of as irrationality.

The irrationality that leads to the inflating in price beyond what complete knowledge and good analysis would suggest can be the result of one thing or of two or more things in combination.

• The irrationality itself is not very easy to see at the beginning, since there would be no bubble if it were apparent.
• The causes start with beliefs that are exciting, but the crowd does not know what it does not know.
• Knowledge is incomplete or just wrong.

When something appears that is new, and seems to have unlimited potential and some mystery about it, that, to me, is "the big one". This has happened many times in history, as when electricity first came to the household; or with the advent of canals, railroads, and radio in the 1920s and so forth. Perceptions, not analysis, drove some of the stocks to ridiculous levels and then that bubble popped.