Being Smart with $$ - How We Fall for Market Bubbles

How do smart people fall victim to market bubbles? It usually happens like this:

1. First we watch others make crazy money every day from investments in an asset class. Like Bitcoin. Fundamentals don’t seem to matter and we realize there is likely a complete disconnect between where it is trading and what it may truly be worth. But that doesn’t matter when it goes higher every day. It’s frustrating to watch others make such easy money while we sit on the sidelines actually working for a living. So we decide to jump in, but only until the bubble starts to burst. Because we think we can see it coming. 
2. We hear of people that sell when it pops higher and buy it every time it drops 10% or 20%. And then when it reaches new highs this strategy seems genius. So we start doing the same.  Or maybe we just buy and hold and ride out the brief dips. 
3. This buy-and-hold AND buy-low, sell-high strategies both seem to work. But then one day we buy low, but instead of moving higher it falls another 10%. We have been accustomed to these drops and believe it is just a chance to buy even cheaper before the next move higher. So we hold on or even buy more. 
4. As the asset class keeps falling, we keep holding believing that something that recently traded for $16,000 must surely recover from $10,000 (even though it was well below $10,000 only a month ago and below $2,000 at the beginning of the year.) 
5. As the asset class continues to plummet, it feels too late to bother to get out and we hang on hoping for some miracle recovery. This never comes.
6. Finally, we ask ourselves how we could fall for something that was so obviously a bubble. Didn’t we learn from the tech stock bubble which fell so much that 10 years after the bubble burst it was still down 50% from its peak?  And we walk away poorer. Hey, we can skip this year’s vacation. Next year we will make it back on some new trade that appears to be going unstoppably higher.

- Larry Pike, CFA, Client Priority Financial Advisors LLC

- www.clientpriority.com 

- Blog: www.clientpriority.blogspot.com