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Bubblephobia — the fear of bubbles — has millions of Americans in its grips these days and for good reason. We’ve had two bubbles burst in the past 14 years and each one cost investors dearly.
Investors who are stricken with this common malady don’t see how much money everyone else is making or how much money it’s costing them to sit on the sidelines, watching the parade pass by.
All they know for sure is that one day — eventually — it will end badly.
And you know what? They’re right!
Every bull market in history has ended in a correction. Some have even ended in massive, painful crashes.
Recently, as we’ve continued our conversation about technology stocks, I’ve heard from several bubblephobes — like Janet of Providence, RI who says …
“The stock market is in bubble-land. No way do I want to be in any kind of stock when the bubble bursts.”
I respect your opinion, Janet. Believe me I do. But forgive me if I respectfully disagree.
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| The fear of bubbles has cost investors dearly. |
First, because for all the reasons I presented Wednesday, all indicators point to the likelihood that we are only about half-way through this bull market.
And second, because I love bubbles.
Bubbles are the single most important part of the investment cycle. They are all about optimism among investors and the public about the future of a technology or service.
You need that kind of enthusiasm to build things that otherwise would never be built, like the transcontinental railway, the airplane, hundreds of thousands of miles of “dark fiber” in the 1990s and so on.
Avoiding bubbles is the LAST thing I want to do.
After all — that’s when things are going UP!
What we need to do is participate fully in each bubble as it comes … make all the money we can while the sun is shining … then get all of our money off the table quickly when the inevitable correction comes.
Do I wish I’d never invested in tech stocks in the 1990s — forfeited all the profits I earned while they were going up?
Do I wish I’d never invested in real estate or any other kind of stock when they were on fire in 2006 and 2007 and forfeited those profits as well?
No, because while we have the freedom to make all the money we want when stocks are going up, there’s no law that says we have to hold those stocks when they start going down!
In other words, we can take most of the good without taking all of the bad.
I’ve done it twice myself: Once in 2000 when I saw the end of the tech boom coming and again in 2007-2008 when the end of the housing boom reared its ugly head.
How we’ll know when the bubble is about to burst
There’s actually a dead give-away: Valuations.
When they’re high and rising, it’s a good thing. It means there’s still time to make money.
But when valuations get insane — like just before the tech wreck when companies with no earnings were trading at up to 148 times book value — it’s time to take your profits off the table.
That’s when patience pays. We wait for things to unwind, then jump back in near the bottom and pick up the survivors for pennies on the dollar.
I know that sounds easy when you say it fast — it’s much tougher to do in the real world. But it’s not impossible. We have all seen it twice before and will likely have a chance to do it again before our investing careers are over.
And in the meantime, it looks for all the world as if these young tech superstars will continue helping us multiply our money for years to come.
Best wishes,
Jon Markman
P.S. Let’s talk tech stocks! Here’s your chance to ask me anything you like about technology stocks: Simply click this link to jump over to the Money and Markets blog. I’ll check in during the day and give you my best answers to your questions.
I won’t be able to do this forever, so be sure to join the conversation right away: Just click this link and let’s get the conversation going!
