How to Invest in a Bubble.

In an earlier post I mentioned that a lot of markets could be in an economic bubble. So from the advice of an expert, here’s how you can invest in a bubble profitably, and safely.

How to Invest in the Beginning of a Bubble.

All bubbles begin looking like a normal bull market. There is reasonable buying and the market is increasing for good reasons, such as a the start of a great period of economic prosperity (e.g. 1982-2000). One must remember that the entire stage of a bubble is known as a secular bull market. A secular bull market can generally be defined as a really bull market, which usually lasts 16-19 years. So how does one know that a secular bull market is under way? Well, you look at the fundamentals. Before a secular bull market comes the secular bear market. Before a secular bull market can commence, all the fundamentals in the economy need to be prepared and stabilized. Once all the key fundamentals are built well (e.g. low inflation, uncompetitive companies are bankrupt, etc), then a secular bull market can start. In the early stages of any bubble (e.g. 1/3 into a secular bull market), there is reasonable buying. Economic conditions are improving, mom and pop are seeing wage increases, inflation is relatively low, etc. This is the time to invest in the bubble.

Many people are afraid of investing in the beginning of a great bull market because they worry if the markets will fall back. There are 2 easy (or not so easy) ways to solve this problem. 1 – History repeats itself. Look for the pattern of a 17 year secular bear market. 2 – Use technical analysis. But this can be pretty challenging. Remember, invest in the beginning of a bubble can prove to be extremely profitable later on. I recommend you invest your entire portfolio in the market at the beginning of the bubble. You’re down side is limited.

How to Invest in the Middle of a Bubble.

The middle of a bull market is when the bubble starts becoming evident. Things are getting pretty hot, but the markets aren’t getting out of control. The upward movement in the markets are still reasonably justified, since people aren’t yet all falling over themselves to invest in the bubble. This is the stage where all the mutual and hedge fund managers start noticing, the the markets start making some front page headlines. The markets begin increasing at an even faster pace, and people start noticing. My advice? Wait and hold onto your position.

How to Invest in the End of a Bubble.

The end of a bubble can be signaled by several things. The “this time is different” is a huge sign that the investment bubble is in it’s final stages. The so called experts start make up total BS about how the markets are going up Up UP! Mom and pop starts investing. In the final stages of a bubble, the only people left are the speculators. There is no longer any underlying fundamental driving the markets up; just pure speculation. This stage of the bubble is also the most dangerous, because no one knows how much higher or longer the markets can go up.

This is the tricky part. I mentioned above that you should wait and hold onto your position, but for how long? A true bull market must surpass its old highs. The bubble usually tests its old highs at the end of the bubble. So once new highs are established, here’s how you can get out of your investment. It’s actually very simple. For every 10% that the markets surpass it’s old highs, you sell 10% of your portfolio. But keep 1/3 of your money still in the market, that way if the markets further doubles or triples, you’re still catching part of the increase. That way, you won’t be caught off guard when the bubble pops.

But once you’re completely out, don’t get back into the market on the buy side. Countless great investors have gotten out of a bubble, only to see it rise day after day, buy back into the bubble with great agony (out of fear of missing possibly huge profits), and getting killed once the bubble popped.

Warning! Don’t short a bubble. No one knows how much further the bubble can go in the end, so by shorting a bubble, you’re pretty much playing a 1 in 8 chance slot machine.

17 thoughts on “How to Invest in a Bubble.”

  1. I don’t understand why they always use the metaphor of a bubble. Isn’t a bubble really fragile and destined to break really fast?!

  2. Huge fan of this post. Long-term successful investing is learning how to sell your winners.

    And yes, real estate speculation is something I won’t understand, especially for small-time investors. There are so many much more liquid markets that are in bull or even bubble territory that are easy to cut out of.

  3. Where I live there has been a huge housing bubble over the last few years and it hasn’t stopped. In fact they expect house prices to rise again next year. I haven’t bought any extra property due to this but I know some that have. I am not sure if it is a good idea or not.

    1. Definitely don’t buy! The problem with houses are that they are not a liquid market. By the time that you see the bubble has popped, you’ll be doomed. It takes months to sell a house, so there’s no way you can get out of a housing price freefall.

  4. I was recently actually was researching the housing bubble. It’s interesting to see how experts thought housing would just go to the sky. Nothing stays parabolic for long. Thanks for the article.

    1. Yes. Unfortunately, the “this time is different” begins to creep into peoples’ minds every a bubble is in the making. 🙁

    1. Something like that (by Warren Buffett). But remember that you must be bold at the right time. For example, if you were bold when others were fearful in September 2008, you still would have gotten killed.

  5. I like this post a lot. I am a firm believer in Kondratieffs long cycles. As such, I believe that there are another several years for the gold market to run and for the stock market to languish.

    1. Yes, I too believe that. But sometimes, the markets can be irrational (such as when one big force is manipulating it).

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