Why is it that many investors get caught up in the hype of making a quick fortune and instead experience poor or mediocre results?
The financial world is littered with examples of speculative bubbles. This is often when common sense goes out the window and people get caught in the lure of making easy money. And it doesn’t seem to matter that these bubbles and the disasters that can follow are well documented.
There are always people queuing up to participate in the ‘next big thing’. History is littered with examples:
- In the 1600s in Holland, fortunes were famously made and lost trading rare tulip bulbs and related options contracts;
- The stock market crash of 1929, creating probably the most significant economic catastrophe ever;
- In Australia, the nickel boom of the late 1960’s which brought Poseidon to prominence. In less than six months, that company’s share price went from $1.85 to a staggering $280.
- The 1987 stock market crash. While the cause of this bubble continues to be debated, its impact was massive. The US market lost almost 23% of its value in just one day. Here in Australia, shares in National Australia Bank fell 37.5%.
- The dot-com boom of the late 1990’s. During this bubble, people were buying stocks on the promise of huge earnings from companies trading in little more than vaporware.
One of the more infamous stories from the dot-com boom is about a company in the US called NetJ.com. In short, the company’s share price rose 700% over a six-month period, which is remarkable. Even more remarkable given the company’s prior announcement to the market to the effect that it was at the time “not engaged in any business activity, nor had any immediate intention to do so”.
The property market, too, has seen its share of boom and bust. In the 1990’s in parts of the UK, negative equity in property was common. Homeowners were handing the keys to their house to the banks which were then left to dispose of the property at whatever price they could.
And in Australia today, some commentators argue we’ve seen highly speculative activity in some sectors of our own property market with unpredictable outcomes.
So, what are the warning signals?
How do we know if we’re in the midst of a speculative bubble? Here’s some things to watch for:
- First, easy access to cheap money provides a great platform for speculative activity. Using someone else’s money to create wealth is a strategy, but it can bring unwelcome results.
- Companies changing names to reflect the current trend. Small companies releasing snippets of positive news in the hope of sending their share prices sky-rocketing. Investors need to look out for company press releases that seem short on detail.
- New trends or the newest new thing in areas such as clothing, technology, music and entertainment can sometimes cause a rational investor to replace fear with the fear of missing out.
So how do you avoid a speculative bubble?
- The best way to avoid getting caught in a bubble is to have a sound long term financial strategy tailored to your lifestyle objectives, and
- Be disciplined in following that strategy over the long haul.
Chasing a quick fortune is a sure way to produce mediocre results. For advice on developing a sound long term investment strategy, contact Allan Hanson on
07 3398 4888 for a complimentary initial consultation.