The past 7 years or so, I have heard a lot of talk about bubbles of various kinds. "There is a bubble." "There is not a bubble." etc etc.
Probably not much an insight but after some thought my feeling is that by the time people start talking about bubbles there always is one. More significantly, i think there is a natural process of bubble creation in all investments because investors are not as rational and logical as we want to believe. Investing may be mathematical but investments are the product of human nature and emotions. (Yes, i have heard of the efficient market theory; i just dont believe it completely.)
We talk about "rugged individualists" and "leaders" but at the end of the day, we are herd animals. Herd-thinking affects behavior for both the upside and the downside.
The downside. It is always safer to go where everyone else is making money than it is to strike out on your own. If things go south and you are all alone, you have some serious explaining to do; it is much safer to go with the herd and be wrong with everyone else. Even professional money suffers from this herd mentality.
the updside. Everyone wants to be a winner, to be a successful investor, but few people really know what they are doing (they just follow models) and no one can predict the future. It is easier to look at what is doing well and bet that the gains will continue, which they do for a while simply because of an increase in investment dollars. (Assets will rise in value simply because more people want to buy them. In theory the market keeps this price inflation in check but Google at $400/share with a P/E ratio of 88?)
Another contributing factor is the estimation of risks. We are very poor at estimating risks and repeated articles show that investors ignore or forget risks under the pressure for gains.
Despite being clearly stated as an assumption in every economic model known to man, we do not have perfect information nor do we invest logically. (There was even a WSJ article this year on how a certain type of brain damage IMPROVES investments because it removes emotions.) These weaknesses are why insider trading works and why we throw good money after bad hoping things will turn around.
Combine the herd mentality and lack of perfect information (and perfect understanding) with fewer and fewer capital controls, and the result is big piles of money flying around the globe which distort the prices of assets. Returns are good for a while and then there is some loud BANG and the herd stampedes in another direction, leaving financial ruin in its haste to move.
There hasn't been a big investment bubble pop in several years. But that wont last.
