The Thoughtful Investor
Bull Market, Trends And Economic Bubbles
What Makes for an Economic Bubble?
This section explains the essential characteristics of an economic bubble and how an astute investor can detect it. A stock market bubble can occur in any asset class or sector and must be supported by liquidity, leverage, and an open-ended dream on anything new or that has been depressed for an extended period of time. In this context, it is important to recognize that there is always a bull market somewhere for an investor to profit from, and regardless of the broad indices, an astute investor will always find ways to multiply wealth if he is on the lookout for a new emerging sector theme.
Brief History of Economic Bubbles
This is followed by a chapter that discusses all of the global bubbles, including the Tulip mania of 1634, the South Sea bubble of 1720, the Railway Mania of 1860, the United States Great Depression of 1929, the Nikkei bull market of 1989, the Nasdaq bubble of 2000, and the United States Housing and Emerging Markets Crisis of 2008.
Each of these bubbles is explained in order to communicate the common theme that ran through them: liquidity and leverage acting on anything new. The purpose of introducing the reader to these previous bubbles and their characteristics is to make it easier for them to attempt to catch the next bubble when it appears.
An attempt has also been made to explain how liquidity, by itself, does not create a bull market, but rather how a bull market is created by the uniqueness of an asset class on which liquidity is made to act as a catalyst. The purpose of discussing past bubbles is to make an investor aware that, while the past does not always accurately predict the future, the patterns mostly remain the same.