“Tiny bubbles … in the wine … make me happy … make me feel fine.”
Like the bubbles in a glass of champagne, bubbles in markets seem to form out of nothing and just as quickly burst and disappear. Possibly the second hardest decision in the markets is to recognize a bubble; the hardest is to know when it will burst. Bubbles are a part of market folklore. The tulip bulb bubble, or “mania”, in the Netherlands in 1637 occurred during the Dutch Golden Age when their economy was considered the most advanced and sophisticated in Europe. At the peak of the bubble, a single tulip bulb sold for 10x the annual income of a skilled artisan! The South Sea Company bubble in the UK in the early 18th century ruined thousands of high-profile British investors, including Isaac Newton, when it popped in 1720. Much more recently the “dot.com” bubble of the late 1990s led to a severe bear market (the S&P 500 was down more than 50%) when it burst in March 2000. Pets.com is a paradigmatic example of this mania, becoming a national sensation after its high-profile IPO despite having meager revenues and huge losses before going out of business just 9 months after its public launch. JDS Uniphase soared from around $10 per share to over a $1100 in just months before making the trip in the opposite direction just months later when the bubble burst.
Bubbles usually occur in times when the economy is strong and all asset prices are high, sending investors in search of “the next big thing”. Many ascribe market bubbles to greed and ignorance, or “irrational exuberance”, all of which may play a role, but bubbles need more than that to form. They usually reflect significant government-generated liquidity that soaks the markets and pushes capital into market niches. Also, they often occur in products that are hard to short sell, thus short-circuiting a mechanism that can keep asset prices more in line with value.
This brings us to 2021. Bitcoin? Do we even really know what it is? Up 1200% in 3 years. Tesla? Up 700% in a year and trading at an astronomic 1200x earnings! These are not “reasonable” numbers and there is no economic justification for them – though they could go higher, much higher. Are they bubbles? As we said, that’s the second most difficult question in the markets. If it was just a few assets one could adopt a “who cares” attitude and just avoid them, but as the dot.com mania so clearly showed, a bursting bubble often takes a lot of innocent casualties down with it. As you ponder the most difficult question, enjoy your champagne while the bubbles last!
Click here to schedule a call with a BWC advisor today.
The information presented in this article is obtained from or based on sources believed to be reliable. BWC does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this article. The article does not purport to contain all the information that an interested party may desire and, in fact, provides only a limited view. Information presented does not constitute an offer to sell or a solicitation of an offer to buy any security.
All investments involve risk, including loss of principal invested. Past Performance does not guarantee future performance. Individual client accounts and performance vary. BWC does not provide tax advice.
About Beirne Wealth Consulting Services, LLC – www.beirnewealth.com
Beirne Wealth Consulting Services, LLC (“BWC”) is a privately owned, SEC Registered Investment Advisor with offices in Connecticut and Pennsylvania. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit www.beirnewealth.com or give us a call today at 888-231-6372.
*Registration does not imply a level of skill or training.
© 2021 Beirne Wealth Consulting Services, LLC (BWC). All rights reserved. Reproduction or Use without permission is prohibited.