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Rene Rivkin

Investment Dictionary


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Investment Bubble

 

Investment bubble is a jump in price of particular investment when price starts increasing faster and faster as long as the price reaches its peak and falls down to a similar to previous level, if there are no other factors. 

 

Sometimes investment bubble elevates only some particular asset class (Tulip Mania case in Holland) sometimes most of them (Japan case) but in most cases a lot of people gets involved in the investment bubble.

 

Stages of investment bubble:

  • Normal growth is a stage when some assets or investments start growing in healthy growth rates because of the reasons that strongly affect demand or supply.
  • Acceleration begins when news about demand or supply of particular investment (or group of assets) is spreading more widely and speculators starts to buy ‘hot’ assets.
  • Rapid growth starts when everybody in the population knows about the opportunity how to make money fast. A huge mass of people gets involved believing that particular investment will keep rising forever or for very long period.
  • Doubts is the stage when object of the investment bubble stops rising in prices. Usually the reason for that happens to be increased supply (driven by increased prices). As they say, if there is a demand, there always will be a supply. The first speculators start selling their assets during this stage. 
  • Rapid fall is the most painful stage when investors understand that asset was overvalued and mass selling starts. Then investments depreciate very strongly until reaches their real market value or even more because of oversupply.

 

Investment bubbles aren’t results of highly leveraged modern economy (however, leverage may accelerate the process) and history of investment bubbles reaches for centuries. The psychology of every bubble is quite simple: some economical, social or technological important events drives ‘hot’ asset class up, then speculators step in and speed up the process. But it is not that simple to recognize the bubble until it enters the last stage, because nobody can be precise on the amplitude of the technological or economical event to the lasting prices of assets. And not every stock market crash is an investment bubble.

 

 






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