Bubbles are fueled by speculators who are willing to pay even greater prices for already overvalued assets sold to them by the speculators who bought them in the preceding round.
Each financial bubble in history has been different, but they all involve a mix of fundamental business and psychological forces. In the beginning stages, an attractive return on a stock or commodity drives prices higher and higher. People make questionable investments with the assumption that they will be able to sell later at a higher price to a "greater fool." Unrealistic investor expectations take hold and become self-fulfilling until the bubble "pops" and prices fall back to a more reasonable underlying value.
Why do bubbles sometimes last so long? One reason is that nobody likes to be a "party pooper" and people ARE getting rich. In addition, there is nothing inherently illegal about profiting during a bubble. The only problem is getting out BEFORE the collapse. Whoever owns the overpriced asset when the bubble pops is the loser, just as the last person standing in a game of musical chairs.
17th century in Holland: Tulip Bulbs bubble (1630s)
1995 - 2001: Technology Stocks bubble
2007: U.S Housing Crisis bubble
Investing in bubbles can be quite profitable if you can get out before the bubble bursts. However, many people who did not get out before the 'pop' saw their market crashed and their wealth value evaporated.
Bubbles are not caused by fraudulent activity. However, swindles and accounting fraud often come to light just after bubbles pop. Nobody is looking and few care while the good times roll. Highly leveraged frauds often run out of cash and collapse when bubbles pop.
1963: Salad Oil Scandal
2001: Enron
2002: WorldCom
Comment:
Is the economy in a bubble? Is the present market a bubble? A definite not. However, some individual stocks had been speculated up to bubble proportions and some had already popped. Individual stock bubbles are a lot more common than whole market bubble.
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