Bubbles

In One Sentence

A bubble is when expectations push prices higher than even future profits can support — and when it bursts, prices often fall too far.

Why It Matters

Almost every bubble starts from something real — tulips, the internet, electric cars — which is why it's so hard to recognize one while you're inside it. In 2024, I used indicators to judge that a bubble in Taiwan stocks was about to burst, and I turned out to be wrong. Now I don't try to guess when a bubble will pop. I stick to just two things: when the market is hot, I don't borrow and don't raise my bets; after a bubble bursts, I buy a little more with new income.

One Number

In China's 2014–2015 stock bubble, the 85% of investors with the lowest incomes lost about 250 billion yuan over 18 months, while the richest 0.5% gained about 250 billion (An, Lou and Shi 2022 · Chapter III).

In the Book

Chapter IV takes apart how bubbles form and what people inside them are thinking. Section 6 of Chapter V explains why I no longer sell by trying to call a bubble's peak.

Go Further

• Market cycles A bubble is the cycle at its hottest extreme.
• Buying in crashes Only after a bubble bursts is it time to add more from new income.
• Robert Shiller The US stock paths through the book's three bubbles come from Shiller's long-run data.
• The timing trap Trying to guess when a bubble will burst lands you in the timing trap.
• Borrowing and leverage People who borrowed during the bubble have the hardest time recovering when it pops.