Summary: Investment commentary these days overflows with mentions of bubbles. The concept is vital to understanding our economy yet encrusted with myths in the minds of most investors. This post cuts through those to the known history and theory of bubbles. As usual with economics, this gives us clues about the future – but only clues. {Second of two posts today.}
- We’re in an era of bubbles, but they’re masked by myths.
- Understanding their history and dynamics can guide our investing.
- Bubbles create high risks not easily managed.
- Failure to prepare for these risks has created serious losses, and will do so again.
Bubbles in history
“You Can’t Cheat An Honest Man.”
— Title of W. C. Fields’ 1940 movie, harshly and cynically describing the essence of bubbles.
Bubbles are an inherent aspect of free market systems, easily produced in classroom exercises. Whether managing a nation or a portfolio, they must be understood.
Those who lived through the giant 19th century UK and US investment bubbles would find our bubbles quite familiar. Journalist and promoter Charles Mackay participated in several, and the scars from them led to his bitter polemic Extraordinary Popular Delusions and The Madness of Crowds
Then and now, bubbles have common characteristics.…
Pingback: The Dragon that Blows Bubbles | al fin next level