The problem with market bubbles is they are hard to spot. Even for those investors who have experienced market booms and busts in the past, market bubbles can creep up on them as there is really no definitive way of predicting them. Ever since the end of the financial crisis, market commentators and Wall Street analysts have said on a regular basis we are in the midst of a market bubble and it is only a matter of time before the market collapses. So far, no crash has materialized, but one could always be just around the corner.
This collection of quotes from some of history’s greatest investors, policymakers and economists discusses market bubbles and how to prepare for them.
"Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart." -- Alan Greenspan
"Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception." -- George Soros (Trades, Portfolio)
"Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth." -- Jeremy Grantham (Trades, Portfolio)
"Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different." -- Grantham
"What we need to understand is, one, that there are market failures; and two, that there are things like asset bubbles and irrational exuberance. There are periods of booms, bubbles and manias. These things, if left to themselves, can lead to crashes, to busts, to panics." -- Nouriel Roubini
“Another sign to watch for: In every bubble, there are always people trying to burst it by declaring that financial assets have become overvalued. At first, Professor Goetzmann says, such skeptics earn respectful attention. But eventually, investors turn on them with anger and ridicule.” -- Jason Zweig
“It gets to a critical mass, this critical point where price action alone starts dominating people’s minds. And when your neighbor has made a lot of money by buying internet stocks, you know, and your wife says that you’re smarter than he is and he’s richer than you are, you know, so why aren’t you doing it? When that gets to a point, when day trading gets going, all of that sort of thing, very hard to point to what does it. I mean, you know, we’ve had hula hoops in this country, we’ve had pet rocks, I mean, you know, and this is the financial manifestation of, you know, a craze of sorts. And I, it’s very hard to tell what got the—all the, you can name a lot of factors that contribute to it but to say what is the one that this time was different that made, why it didn’t catch fire earlier, I can’t give you the answer.” – Warren Buffett (Trades, Portfolio)
“If the history of bubbles teaches us anything, it’s to be humble…Fama doesn’t think we can predict bubbles. Shiller thinks we can, but doesn’t think we can ever know when they’ll collapse. What we need, but I know we’ll never get, is more of this type of thinking. I’m holding out for a humility bubble. “ -- Morgan Housel
“Speculative bubbles do not end like a short story, novel or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.” -- Robert Shiller
“Like most trends, at the beginning it’s driven by fundamentals, at some point speculation takes over. What the wise man does in the beginning, the fool does in the end." -- Buffett
"The world went mad. What we learn from history is that people don’t learn from history.” – Buffett
