Bubbles…… A word that normally evokes images of children having fun means something quite different in the business news. There always seems to be plenty of talk about a potential ‘bubble’ in the housing and/or share markets. So what does this mean?
The most famous example of a bubble was ‘tulip mania’, a period in Holland in the 1600’s. Tulip bulbs had only recently been introduced and when something is popular, prices naturally increase. It’s all part of the normal function of the economy. In this case however, people began noticing that the bulbs were increasing in value so kept buying them purely in the hope of the price increases continuing. They were ‘speculating’, everyone knew that the true value of a tulip bulb was nowhere near the prices, equivalent to around $800,000, which made it to around 10 times the annual average wages! When these types of bubbles occur, sooner or later worry slips in, the bubble bursts and those left holding tulip bulbs lose out.
In reality, it’s never quite as obvious as the tulips, but the smart investor will always be on the lookout for this irrational behaviour.
– James Davis
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