Phase 3: The Bursting of the Bubble
All bubbles eventually burst, though there seems to be no single precipitating event that causes the reassessment. Instead, there is a confluence of factors that seem to lead to the price implosion. The first is that bubbles need ever more new investors (or at least new investment money) flowing in for sustenance. At some point, you run out of suckers as the investors who are the best targets for the sales pitch become fully invested. The second is that each new entrant into the bubble is more outrageous than the previous one. Consider, for instance, the dot.com bubble. While the initial entrants like America Online and even Amazon.com might have had a possibility of reaching their stated goals, the new dot.com companies that were listed in the late 1990s were often idea companies with no vision of how to generate commercial success. As these new firms flood the market, even those who are apologists for high prices find themselves exhausted trying to explain the unexplainable.
The first hint of doubt among the true believers turns quickly to panic as reality sets in. Well devised exit strategies break down as everyone heads for the exit doors at the same time. The same forces that created the bubble cause its demise and the speed and magnitude of the crash mirror the formation of the bubble in the first place.
Phase 4: The Aftermath
In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.
As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.
Finally, investors draw lessons that they swear they will adhere to from this point on. I will never invest in a tulip bulb again or I will never invest in a dot.com company again becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.
Warnie - I gave you a TU for effort and effort only.
one question, if graphite is a bubble, why is SYR holding above $5? Heck if they have enough to supply the world for 100 years, surely they are overvalued to buggery...
Tesla's gigaplant will require six new graphite mines to supply it. Do you think they will be the only such plant?
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