X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Identifying 'Asset Bubbles' - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 30, 2010

    Identifying 'Asset Bubbles'

    Wikipedia defines an asset bubble as "trade in products or assets in high volumes at prices that are considerably at variance with the intrinsic value". Let's try and break this definition down to make things clearer. A bubble is said to exist if the following conditions are met:

    In short it is a 'temporary' market condition that is created through excessive buying wherein an unfounded run up in prices occurs.

    What are the characteristics of a bubble?

    Having identified what a bubble is. Let us now try and build a model of characteristics that are typical to an asset bubble. Late monetary theorist, Hyman Minsky helped us out with this one.
    • Displacement - There is usually a major shock to the macroeconomic system that leads to the beginning of a bubble build up. This shock maybe good or bad. Such a shock brings about a displacement or a radical change. This change could lead to opportunities for profit in some 'new' or till now ignored avenues. And may also lead to closing of some popular investment avenues.

    • Expansion of credit: There is a growth in the level of debt in the system that feeds the boom. The total supply of money in the system expands and most of it is channeled towards buying the asset.

    • Euphoria: As demand for the asset increases, the prices start to rise. The urge to speculate starts to kick in that send the prices spiraling upwards. The net result is that investors start living in a paradise that prices of the asset would keep going up. There kicks in a state of 'euphoria' surrounding it.

    • Speculative boom: As investors start to rush in, they start to rationalize their investments. They do this by overestimating their profits. They start to justify the returns using big words and jargons. The prices of the asset literally boom at this point of time. Such a stage may last for some time. It could even extend to some years.
    Hence a 'bubble' comes to exist in the market. Some examples of bubbles in history would be:

    The Great Depression (1929): The Americans were all gung ho about the stock markets. The stock market almost offered a guarantee to make everyone rich. People were investing in all kinds of stocks. The fundamentals of the underlying companies did not hold any importance. Investors kept pouring in more and more money into them. By the end of the depression in 1932, the markets had crashed almost 90%.

    Source: Yahoo Finance

    'Dotcom' mania: Internet was the buzzword at this time. Anything even remotely related to internet would definitely be a 'hit'. The stock markets went after companies that just defied common logic and created bogus valuations that just did not justify fundamental reality. The euphoria could not be justified through conventional accounting. The NASDAQ index finally crashed by 78% by mid 2002 leading to a 'burst' in the bubble. The internet stocks never again traded at the high valuations seen during the mania.

    Source: Yahoo Finance

    The aim of this article was to understand what asset bubbles are and what are the typical characteristics that can be associated with them. Over the next few articles we will examine some popular investment destinations that are being talked about in recent times. And we will try to see if these have the characteristics of being a 'bubble' or not.

     

     

    Equitymaster requests your view! Post a comment on "Identifying 'Asset Bubbles'". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS