Can Bubbles be a Good Thing?

Economic BubbleThere are plenty of buzzwords in the investor’s vocabulary, but no word inspires more fear and dread than ‘bubble’. Anyone who can remember 2008 should know well enough why. The current generation grew up in an age where a bubble threatened their way of life, but can it be a good thing?

Riding the Bubble

One of the first things that novice investors need to learn is patience – not to panic and sell at the first downward trend. The second thing they need to learn is to recognize how to ride a high and sell when the buying is good. In short, they need to make use of bubbles whenever they arise.

Most people understand that it’s not the bubbles themselves that they need to avoid – it’s the pop. Knowing when to jump off an investment bubble, however, is one of the most difficult things to do, especially since it partially conflicts with the patience rule.

The Proper Way to Ride a Bubble

Investors need to complete two steps in order to successfully ride a bubble and not suffer through a pop. The first is to recognise a good investment, which many will attest is the hardest part of the entire process. The free market is nothing but fickle, and the best or first version of an idea may not be the one that gets traction.

Think of it like choosing between several housing and land packages: they all look good. But, which one is more likely to rise in resale value? The answer would depend on location, the surrounding community, and even wildcards like weather.

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The second step is for investors to constantly remind themselves that every business venture is temporary. It may not be apparent with big names such as Apple, General Motors, Google, and the like, but there will always be a downturn – always. The trick is to take a closer look at news outside the market and make a judgement call on where things are most probably headed.

Choosing a Bubble to Ride

This leads to a basic investing rule that is often ignored – only invest in things you understand. Investors that heed the wisdom of this rule find – more often than not – that riding the bubble is easier than most people make it out to be. It’s simply easier to cast an accurate prediction about a market’s direction and act appropriately if you have intimate knowledge about how it behaves.

Bubbles rise and pop every day, and there’s nothing wrong with taking advantage of them. Once people stop seeing them as harbingers of destruction, they’ll have a powerful tool at their disposal.