Bubbles-Too Good to Be True

Okay, since we are off topic anyway, I thought I would share my latest book acquisitions with you:

Hot off the presses, Henry Paulson, Jr.'s memoir, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System."
Slightly older but still very relevant, Andrew Ross Sorkin's book, "Too Big to Fail."

I have always had a passion for reading books about stock market "bubbles" and the following "busts." Prior to these, my favorite was "Dot Con: The Greatest Story Ever Sold." That was about the technology bubble.

Bubbles are defined as prices that grow higher than the actual value of the underlying item, stock, or commodity. One of the funniest was the Dutch Tulip Bubble of 1637, where citizens became tulip crazy and traded the bulbs at higher and higher prices. The problem is always for the last purchaser before the bubble bursts. They pay the item at an inflated price, intending to sell it. Then, the bubble bursts, the prices fall, and the asset stays in their position, as they are unwilling to let it go at a loss. Often, the loss accelerates, until many times, the underlying asset is worthless.

This happened with the tulips. It also happened with some dot.com startup companies. Fortunately, however awful the housing bubble became, at least the houses still have some value. The problem is that people borrowed money against the supposed "value" of their house, leaving them today with more debt than home value. When this happens to someone, we say they are "underwater" in their mortgage (or other debt).

Bubbles can be seen in advance, but the allure of "flipping" the item can be overly tempting. Just remember, if it seems to good to be true, you're right.

Be prosperous!
Peggy Doviak