Bubbles, bubbles, everywhere, when a bubble gets big enough it will burst. Speculative investors get excited whenever there’s a stock bubble of any kind. There’s the excitement of making it rich very quickly. Should you invest when stock prices are soaring?
The quick-rich euphoria then trickles down to the everyday Joe, and then your friends and neighbors start talking about stocks. Have you been to a party recently where so and so talked about investing in Tesla, Twitter, Facebook, or the latest social media IPO? It’s easy to get caught up in the hype, and start buying stocks without doing your homework.
Problems arise when bubbles burst and you’re left with huge losses.
In the book, Investing the Templeton Way the authors Lauren Templeton and Scott Phillips discuss bubbles in Chapter 6. In early 1999 Lauren Templeton visited her great-uncle Sir John Templeton (Uncle John) in the Bahamas, she wrote:
“Not quite sure what to say, I blurted out a largely spontaneous and regrettable question: ‘Uncle John, have you been buying any technology stocks?’ He calmly glanced over at me, gently set his Coke down onto the table, and with the slightest smile said, ‘Let me tell you a story.’
When I was a young boy growing up in Winchester, Tennessee, I can remember one summer evening at dusk when my brother and I raced down the street on foot to a large crowd gathered outside the front porch of a house. Nearly the whole town was standing outside this man’s house, waiting anxiously. Finally, the man appeared at the front door, smiling, and motioned to all of us to wait just a moment. He returned inside the house, and within a moment the whole house lit up with the flip of a switch. The crowd that had gathered yelled and clapped with joy…it was the spread of electricity, and it changed the world forever, but the time to get out of those stocks was many years before.
From there he described a number of financial markets bubbles that spanned centuries, going back to tulips in Holland in the 1630s. There was a Mississippi bubble conceived by French speculators, a South Sea bubble in England, and of course a railroad boom and bust. Even in more modern times there have been speculative bubbles in wireless radio communications, cars, and televisions. Uncle John has always been fascinated by this behavior, even to the point of having the Templeton Foundation Press issue a reprint of Extraordinary Popular Delusions and the Madness of Crowds. What I found most remarkable about his recounting of economic activity that morphs into public euphoria were the common threads of economic circumstances and human behavior in each instance. When you take the time to study the events, even the ones going back centuries, there are familiar elements in each one. If you remember the Internet bubble, you probably have a rough sense of déjà vu when you examine the South Sea bubble in spite of the fact that it occurred in the eighteenth-century England.”*
What’s the moral of the story? Bubbles have occurred throughout history and will continue to occur in the future, the key is to avoid them, do not get caught up in the hype.
Focus on acquiring quality stocks when they are undervalued and you will do very well for yourself in the long run. And remember this quote from one of the greatest value investor of our time:
The four most expensive words in the English language are "this time it’s different". - Sir John Templeton
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* Investing the Templeton Way by Lauren Templeton and Scott Phillips, page 134-135