Sure, bubbles are fun for the hot second that they’re relevant and making people money. However, the turning point will inevitably come. Remember, what overvalued stock goes up must come down. When a stock or asset is highly overvalued, it will stand to be corrected by the market once the profits have gone dry.
Bubbles could be prevented if there wasn’t this thing called greed. It’s clearly evident that Wall Street could care less about the repercussions their actions have on Main Street. Their sole job is to generate returns at whatever cost. This is why bubble after bubble is created. It’s an endless cycle. Therefore, it’s up to each individual to make sure they don’t get caught up in the dirty games that Wall Street and their analysts play.
Investopedia put together 5 signs that indicate a bubble is happening so that you can avoid them. We’ll share them as they’re great:
1. Media Hype: It’s best to realize that the media is bipolar. The same media that told you that Enron, tech stocks, and real estate were the best investments ever were the same ones that delivered the news that these tactics had failed. A lot of media analysts are paid to promote the stocks they recommend by the companies themselves. Don’t buy into the hype.
2. Too Great to Fail: Realize that there’s nothing too great to fail. The same thing was said about the Titanic, the British Empire, Lehman Brothers, and the US position in Vietnam. Nothing is guaranteed. Remain skeptical of anyone making these false claims.
3. Popularity: While it may feel safe to run with the crowd, it certainly does not pay off. The greatest investors of our time got their fortunes by going against the crowd. Besides, think about the crowd that you’re going along with and their supposed financial education. Chances are some of them are just mindless sheep who have also bought the hype sold by the media.
4. Spike in Prices: If prices are increasing rapidly, there should be a reason for it. Being Jim Cramer’s top five faves is not a good reason. There should be an explanation for the increase in that stock or asset’s value. Otherwise, it’s just a bag of hot air.
5. Put purchase increases: If there’s a significant increase in put buying, then that may indicate that professionals suspect that the stock has run its course and is set to fall. Puts are issued when an investor suspects the price of a stock will fall. That’s how many seasoned investors profited after the real estate bubble by speculating that real estate stocks would fall. So, stay alert for these signs.
With these signs in mind, you’ll be well prepared when the next bubble arises. Wall Street will do whatever they have to in order to keep profits flowing. Don’t fall victim to their traps. Instead, use these signs to stay on top of them.
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