Sunday, April 13, 2008

Are You Ready for the Next Bubble?

Ready to pop!
Bubbles have a way of reappearing. When one pops, a new one starts to inflate. There was the dot-com bubble, then the housing bubble, somewhere in between there was an emerging market bubble and now possibly a commodity bubble. So what gives? Are we destined to jump from bubble to bubble – fervently trying to avoid the mess the eventual popping creates?

What creates a bubble? I my humble opinion it is greed. I know I was greedy when I jumped on the dot-com bandwagon. I was looking for easy and fast money. I had no idea what I was buying but the allure of easy return was compelling. The herd was sold on the concept and I did not want to be left behind. The media was pandering to what the public wanted. Wall Street as usual was busy minting money.

When that bubble fizzled, we licked our wounds for a while and then wondered how we double, triple and quadruple our money – quickly. Buying and selling property seemed to fit the bill. Driven by the promise of a quick buck – we piled in on the real estate boom. Investment property, second homes, flipping and expecting outsized leveraged profits all seemed to make sense. Once again the media and Wall Street got behind the craze.

The routine is pretty obvious. Today we are in the throes of another get rich quick scheme gone awry. There is speculation (how bad will it get), there is incredulousness (what were people thinking), there is finger pointing (don’t blame Mr. Greenspan) and there is anxiousness – where should I invest my money? The common phrases to epitomize the investment dilemma are - there is money on the sidelines or the more exotic sounding reference to excess liquidity sloshing around in the market. In other words – folks are sitting on cash waiting for the next great investment opportunity. What will that be – maybe social networking, wireless broadband, frontier markets, energy … Sooner or later there will another once in a lifetime opportunity because this time it will be different.

If you are smart enough to time the market or identify the next trend – go for it. Most people I know (including myself) cannot. My strategy is to stick with the dull and boring. Invest consistently and regularly in a diversified set of markets or businesses. Since I have time on my side – a 10% annualized return will do wonders for my portfolio in the long term. Will I miss the next big thing? Probably but I would rather go slow and steady instead of ‘double or nothing’. After all there is always the super lotto – if I feel lucky!

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