Every market bubble reveals important lessons after it bursts. Some of those lessons are one-off, tied to a specific bubble. The important lessons emerge each time prices reach euphoric heights.
John Kenneth Galbraith highlighted two such lessons from the 1920s bubble during a Congressional Hearing in 1979. His first is discussed often (so I’ll keep it short). His second can be found outside bubblier times too.
A sound idea carried too far
Prices first went up because of good earnings. Then they took leave of reality. The market was taken over by people for whom the only important fact was that prices were going up. Their buying then put up the prices but with the certainty that when the supply of such speculators — and gulls — ran out, as eventually it would, the upward movement would come to an end and prices would collapse in the rush to realize and get out. This, to repeat, is the classic speculative sequence.
If the only reason for buying a stock is because the price went up…buyer beware. Continue Reading…