“Men who can both be right and sit tight are uncommon.”
— Jesse Livermore

In the previous post we discussed the first known bubble (Tulipomania). In this post we will assess other more tangible examples that should help you forget the notion of "Now or never" with stocks you want to purchase. 


BUBBLICIOUS


We've all at one point or another tried to blow the biggest bubble we can. We dance that fine line of trying to get it as big as we can without it snapping gum back in our face. The analogy of a bubble is quote symbolic, and in turn, quite perfect. When you're first blowing a bubble it takes quite a bit more effort than it does to actually pop it at the end. That said, there is also an inflection point where it doesn't take much effort to actually make the bubble get bigger. Physics takes over and the volume inside the bubble is optimal for growing it. That is of course until it's not. 

If you recall from the previous installment we talked about the first known bubble, Tulip mania (or Tulipomania). Since it's hard to grasp relative to today's terms let's use stocks and indexes to illustrate what a bubble looks like and what happens when the gum snaps. 


.COM (1995 - 2001) 


Sure many of you have heard of the .com boom/bust but how many of you have actually taken the time to investigate just how big it really was? Fear not, we'll take a look at some of what went down during that era. 

Let's take a look at some individual names from the .com bubble. Most of these companies still exist today. 

Some of these companies eventually recovered (AMZN AAPL) but most do not and never do. 


HOUSING SUB PRIME


Soon after the dot com bubble dust settled we were in the middle of yet another cataclysmic bubble, the housing bubble. In many cases this was significantly worse than the dot com bubble because it impacted many sectors across the board and scarred many investors for years to come. Some of the stocks that were resilient through the .com collapse (namely banks) were absolutely obliterated after the housing crisis. Take a look at just how big some of these decays where. 


POP


So what did we learn? We learned that typically when markets take off things get vertical pretty quickly and they last for multiple years. We also learned that when they break, they fucking break. The breach of trend is typically at least a 50% correction and that correction is much more violent than the uptrend. If the market leader turns out to be the cause of the bubble, that break is typically significantly more than the 50% correction and usually 80% or more is lost. 

That said, we need to remember our rules. We need to stay disciplined when things break trend and learn to get out when our stops are blown. Even though we don't need anymore reminders, let's conclude by going over the basic flow of a bubble. 

Let the games begin.

 

 

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