When a bull run goes on for too long, it can morph into irrational exuberance. People tend to think that the market has changed and that stock will continue to go up forever. In reality, it won't - instead, a stock market bubble is gradually inflating.
Unfortunately, most people get caught in the hype and continue to buy while the bubble continues to inflate. Then that bubble bursts without warning, sending shares of stock down 50 percent and more. Asset bubbles have formed repeatedly over time, but most people can't recognize a bubble until after it bursts.
The most recent stock bubble was the Internet stock bubble, which inflated in the 1990s and burst in the early 2000s. Many people who got caught up in Internet stocks lost 50% to 70% on their portfolio - and some lost as much as 90%.
Value investors such as Warren Buffett didn't play in that market. Value investors will not buy a stock that doesn't have a proven cash flow. Internet stocks were losing money every year. Most hadn't even figured out how they would make a profit. Yet analysts recommended them based on future earnings projections.
If you can't figure how a company will generate its cash flow, walk away from it. Don't ever get caught up in promises of future earnings that have not yet materialized.
Unfortunately, most people get caught in the hype and continue to buy while the bubble continues to inflate. Then that bubble bursts without warning, sending shares of stock down 50 percent and more. Asset bubbles have formed repeatedly over time, but most people can't recognize a bubble until after it bursts.
The most recent stock bubble was the Internet stock bubble, which inflated in the 1990s and burst in the early 2000s. Many people who got caught up in Internet stocks lost 50% to 70% on their portfolio - and some lost as much as 90%.
Value investors such as Warren Buffett didn't play in that market. Value investors will not buy a stock that doesn't have a proven cash flow. Internet stocks were losing money every year. Most hadn't even figured out how they would make a profit. Yet analysts recommended them based on future earnings projections.
If you can't figure how a company will generate its cash flow, walk away from it. Don't ever get caught up in promises of future earnings that have not yet materialized.
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