Saturday, January 6, 2018

Five Steps of a Bubble

          Courtesy : Investopedia


1.    Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low. A classic example of displacement is the decline in the federal funds rate from 6.5% in May, 2000, to 1% in June, 2003. Over this three-year period, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic lows of 5.21%, sowing the seeds for the housing bubble.

2.    Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.


3.    Euphoria: During this phase,caution is thrown to the wind, as asset prices skyrocket. The "greater fool" theory plays out everywhere.
Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%. Similarly, at the height of the internet bubble in March, 2000, the combined value of all technology stocks on the Nasdaq was higher than the GDP of most nations.
During the euphoric phase, new valuation measures and metrics are touted to justify the relentless rise in asset prices.

4.    Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health, because, as John Maynard Keynes put it, "the markets can stay irrational longer than you can stay solvent."
Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again. In August, 2007, for example, French bank BNP Paribas halted withdrawals from three investment funds with substantial exposure to U.S. subprime mortgages because it could not value their holdings. While this development initially rattled financial markets, it was brushed aside over the next couple months, as global equity markets reached new highs. In retrospect, this relatively minor event was indeed a warning sign of the turbulent times to come.

5.    Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.
One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy and Fannie Mae, Freddie Mac and AIG almost collapsed. The S&P 500 plunged almost 17% that month, its ninth-worst monthly performance. In that single month, global equity markets lost a staggering $9.3 trillion of 22% of their combined market capitalization.




28 comments :

  1. Dear Sir,
    Wish u happy new year.
    With yur blessing i am in good profit in Balalji Amines & Websol which bought after your recommandation at very lower price which trun out to be change of my & my family life.still holding the same.
    I hope you must be tracking the both company.Please up date your idea on both the company present & future business prospectus.
    Awaiting your response.
    A big salute to you sir,
    Regards

    ReplyDelete
    Replies
    1. If you are not a low risk investor keep the status quo.

      Delete
  2. Sir, what is your view on ASTEC LIFE SCIENCE ? i'm holding since one year but no further movement. is it worth for hold longterm ?

    ReplyDelete
    Replies
    1. Entry price is very important in case of any investment.Actually Astec is a stock suggested at Rs.57 which already given 10 times return at CMP Rs.619 . Not expecting half of that speed in appreciation from hereon.

      Delete
  3. Good Morning sir. As you know most of the companies valuations are very high. Do you think Bubble burst is near by...

    ReplyDelete
    Replies
    1. valuation is not a constant one ,improvement in corporate earnings can also change the equation , but unnecessary hype in the stock price of poorly managed one's is a real concern.

      Delete
  4. nice read, thx
    Sir, whats your view on Sanwaria Agro. What you think will be the value of the share by end of this year. thx

    ReplyDelete
  5. Thank you for the reminder.

    I understand everyone's opinion might differ but whats your personal opinion about where do we stand at the moment? Between boom and euphoria? or are we into euphoria already?

    ReplyDelete
    Replies
    1. Not interested for a generalization, but one should consider the situation in each individual stocks before deciding on fresh investment

      Delete
  6. Thanks for sharing your insights,please do share your views about Prakash Constrowell
    Kallam Spinning Mills
    Acknit Industries
    TIC ltd
    Aro granite industries
    Aurionpro
    South Indian Bank.

    ReplyDelete
    Replies
    1. Sorry,not tracking any of these companies

      Delete
  7. Any change in view on IDFC BANK sir ?snd what’s view on steel sector ?

    ReplyDelete
    Replies
    1. No change in IDFC Bank .

      In case of Steel Companies - We all know the reason of rise in steel companies is mainly due to the protection duties on Chinese import to protect local producers ,but my doubt is when inflation inching up continuously how long government can continue such duties on many such items . keeping fingers crossed

      Delete
  8. Sir any views on NOCIL at CMP?

    ReplyDelete
  9. Dear sir
    Do you tracking any of following
    Ester industries
    Creative eye
    Pochiraju industries

    Thanks regards
    Varkumar

    ReplyDelete
  10. Dear VP sir, wishing you vry happy prosperous & healthy new year 2018. I had lost huge amount in stock mkt by following unscrupulous advisors in MMB in initial years. I feel very fortunate to have come across your blog & two others wherein I have learned quite bit about studying stocks & building conviction & above all having patience for long term gains. My portfolio is finally green. Thanking you from the bottom of my heart.

    ReplyDelete
    Replies
    1. :) ,Try to stick on a successful strategy and ignore the voice of crowd . If is easy to gain wealth but sustaining on it is most important . Discipline is the most important part in it.

      Delete
  11. Dear Sir, could you please give your views on Marico at current levels?

    ReplyDelete
  12. Hi VP Sir,

    Please provide your views on below stocks,
    ZEE Media, Haldyn Glass, Sarla Performance, Dwarikesh Sugar.

    Thanks in Advance,
    Ranjeeth

    ReplyDelete
  13. Hi sir,

    Any view on Oberoi Realty, Prakash Ind at cmp. Both has moved in past few days. Can we hold..? Please reply

    Regards,
    Kartheek

    ReplyDelete
    Replies
    1. Tracking only Prakash which earlier suggested at Rs.61 . Prefer to hold.

      Delete
  14. sir,your view on irb invit for 1-3 years??

    ReplyDelete

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