In 2008 we experienced the "real estate bubble" – home prices, which had appreciated greatly in a short time period, suddenly experienced a steep decline. Like a burst bubble, prices came down fast. It was similar to the dot com bubble we saw in 2000-2001, when prices of technology companies came crashing down after a huge run up.
Bubbles are nothing new. How about the Beanie Babies craze in the 90's? Japan experienced a bubble in the late 1980's when the Nikkei and land values were propped up by fevered speculation. The Roaring 20's were fueled by huge amounts of credit, something that was new to consumers. But we can go back much farther and still find bubble experiences. In the 1720's England saw the "South Seas Bubble", as the price of stock in the South Seas Trading Company shot up by speculators gambling on the success of the company's plan to take over the British national debt. (Sir Isaac Newton is said to have lost £20,000!) At the same time the US saw the "Mississippi Bubble", named after the French Mississippi Company that took on the entire French national debt, promising investors 120 percent profits! And lastly, the famous "tulip bubble" of 1634, in which the price of tulips soared and people mortgaged their homes to buy the flower.
Bubbles occur when investors ignore the real value of an investment and instead buy on frenzied speculation. While the promise of future gain is inherent in investing, it should be done with good analysis as to the value of the asset and the likely prospects for gain. When investors rush into an investment that has no basis for its price, that is reason to be wary. Like a boiling pot, there will always be bubbles popping up – some say the gold market is in a bubble now. Smart investors take their time to understand the fundamentals and the true value of their purchase.
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