Very often, we would hear the term ‘It’s Different This Time’ during a market bubble. The term ‘bubble’ in a financial context, generally refers to a situation where the price for an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset.
However, how can I prove that something is a bubble? After all, bubbles are usually identified only in retrospect, after the bubble has burst. A basic characteristic of bubbles is the suspension of disbelief by most participants during the this phase. There is a failure to recognise that investors are engaged in a speculative exercise which is not supported by sound valuation techniques. As a result, the cry of ‘bubble’ is more often proven wrong than right.
Think you are smart? Think again. Britain’s most celebrated scientist was not immune to ...
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