No one wants their bubble of any kind to burst, particularly in the stock market. The bubble theory is a school of thought that says a stock or other asset can have a rapid rise in price well above its true value. This can go on for years, but without any warning the bubble bursts, causing the price to decline rapidly. Eventually, it could stabilize at a more realistic level.
Think of the “dot bombs” in the 1990s, where investors were frantically trying to throw money at Internet start-ups, even though many had no source of revenue. Eventually that bubble burst, leaving many with worthless stocks.
Besides the stock market, the bubble theory can take place in commodities, a particular industry, the housing market, or in a really comfortable bathtub. To avoid bubbles bursting, your best bet might be to avoid “cult stocks” that are overvalued, and stick with those that have healthy financials to back up a high stock price. Also, make sure the water's not too hot before you get in.
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Finance: What is a Bubble?5 Views
Finance allah shmoop what is ah bubble All right well
this is a bubble See what happened there got bigger
and bigger and bigger And then it popped and here's
the stock market from about nineteen Ninety two until about
two thousand It got bigger and bigger and bigger And
then it popped And yet was a bubble not just
a big fat bull market It was a crazy ludicrous
tulip mania Kind of time like start ups with almost
no revenues trading and billions of dollars Yep And tulip
mania That was a really thing One tulip sold for
forty grand go figure wasn't like if you ate it
you lived forever So yeah it was a bubble So
what caused the ninety nine bubble Well greed and it
wasn't good At least for some The internet had come
along It was a new thing consumers by the millions
could download in the privacy of their homes Art films
Yeah That's what we'll call them art films by the
terabyte money was flowing from silicon valley investors into startups
at record pace hoping to take advantage of this new
amazing internet thing and the valuations of companies got higher
And higher and higher Nasdaq went up some four hundred
percent in just half a dozen years and the blessed
cos traded at one hundred times trailing revenue not earnings
but revenue So if you think about the idea that
if you invest a dollar and you want to get
more than that back and that dollar comes from profits
of companies than one hundred times revenues cos we're probably
something like five hundred times earnings or more So for
one hundred dollars oven investment you've got like a dollar
of revenues in twenty cents of potential earnings Like maybe
a a decade later maybe yeah that's a bubble and
it burst At least you don't have that danger with
actual tulips or bitcoins Yeah they take bitcoins when you
buy tulips Would be kind of a good marriage there
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