Financial Bubbles [Post 6]

Who Should Read This

Anyone interested in not allowing their emotions to control their financial wellbeing.

Why You Should Care

Going against your better judgement to buy into the “next hot thing” is one way people can find themselves in a hole financially.

What is a Financial Bubble?

A bubble is when the market value of something increases rapidly and exceeds its true, intrinsic value. The result is an eventual “pop” and massive decline in the value of the asset.

Recent Memory

During 2021 we saw meme stocks (popular stocks due to social media sentiment), NFTs (digitally owned images), and cryptocurrency (digital currency) explode in popularity before their sudden demise.

Fueled by hype in the media in the month of January 2021, GameStop stock rose from below $20 to astronomical levels of over $350 (and over $500 in pre-market hours) to settle back to below $20 to end 2022. Leaving anyone who thought they would miss out if they didn’t buy on January 27th or 29th feeling a little foolish and less wealthy than before their gamble.

Wikimedia Foundation. (2023, January 1). GameStop short squeeze. Wikipedia.

https://en.wikipedia.org/wiki/GameStop_short_squeeze

In the non-fungible token (NFT) world, where digitally owned images can be egregiously overpriced, even celebrities were not immune to the craze. Justin Bieber lost over $1 million on a Bored Ape Yacht Club NFT and Michael Jordan’s “6 Rings” NFT lost 90% of its value.

Nambiampurath, R. (2022, November 17). Justin Bieber and Michael Jordan among celebrities impacted by NFT slump amid FTX collapse. Investopedia.

https://www.investopedia.com/michael-jordan-and-justin-bieber-lose-nft-value-6830108

Close to Home

The internet isn’t the only place economic bubbles can form. Many people in the early 2000s never imagined buying a home would be a wager they would find themselves on the losing end of.

Leading up to the United States housing crisis of 2008, many scrambled to buy more home than they could afford because they feared rising housing prices would block them from ever buying their dream home. That would prove costly for some, even “financial pros” fell victim to the crash in 2008. Financial planner, author, and New York Times columnist Carl Richards was forced to sell his family’s home after he was unable to continue borrowing money against the house.

Richards, C. (2011, November 9). How a financial pro lost his house. The New York Times. https://www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html

Conclusion

These brief instances of cloudy judgement are often driven by emotion and a false sense of scarcity, not calculated logic. If you ever find yourself feeling you will miss out if you don’t purchase something NOW for more than you would like to pay… there’s a good chance you should probably do nothing.

There are always exceptions but be careful to not fall victim to thinking you’re missing out or “this time is different.” Otherwise, you might just find yourself in a bubble… that’s about to pop.