- (0:30) - The Many Stages of Stock Market Bubbles
- (5:00) - FOMO: The Fear Of Missing Out
- (11:30) - Examples of History's Biggest Bubbles
- (14:50) - Bitcoin: Is a Bubble In Progress?
- (25:00) - How To Avoid Getting Hurt With Bitcoin
- (30.30) - Episode Roundup: Podcast@Zacks.com
Welcome to Episode #111 of the Zacks Market Edge Podcast.
Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.
In this episode, Tracey is joined by Kevin Cook, Zacks Senior Strategist and the host of the Mind Over Money podcast, to discuss the history of manias.
How do they start? What’s the psychology behind wanting to get in? What makes people jump in even when they know there is danger there?
And how can investors in cryptocurrencies avoid getting burned? Or can they?
A History of Manias
Charles Kindleberger, a PHD economic historian who passed away in 2003 at age 92, wrote what Tracey believes to be “the guide” to manias in the 1970s called Manias, Panics and Crashes, a history of financial crises.
Tracey has the 4th edition, which was published in 2000, fittingly, as the dot-com bubble was about to burst.
In it, Kindleberger looks at the stages and conditions of manias. Not surprisingly, over the ages, each of the manias have had similar features including speculation and increased liquidity due to monetary expansion.
In many cases, there is even governmental or regulatory warning.
Remember Chairman Greenspan’s infamous “warning” in 1996 about the “irrational exuberance” in the stock market?
Will You Be “Newtoned”?
Perhaps one of the most famous victims of a mania was Sir Isaac Newton who invested in shares of the South Sea Company in 1720. As Kindleberger recounts, his first investment did splendidly well. He saw a 100% gain of seven thousand pounds.
But as the mania picked up steam, and he was now on the sidelines, it sucked him back in. He reentered the market at the top the second time and ended up losing twenty thousand pounds.
He said in the spring of that year, “I can calculate the motions of the heavenly bodies, but not the madness of people.”
There are plenty of early Bitcoin investors who have cashed out. But will they jump back in, lured, like Newton, by the momentum of the market?
Manias Overshadow Other Assets
One hallmark of many manias is that other asset classes usually do quite well during the same time period.
For instance, during the Tulip Mania in the 1600s, housing prices rose sharply, investors were jumping into plays on the canals, and shares in the Dutch East India Company doubled.
And now there are the cryptocurrencies, including Bitcoin and Litecoin, soaring at the same time that the major stock indexes are hitting new all-time highs.
But in the public’s mind, stocks are being left in the dust by Bitcoin mania.
Yet, many stocks have had extraordinary years as well. Mega-cap Boeing (BA - Free Report) is up nearly 90% year-to-date while a company like Exact Sciences (EXAS - Free Report) , which isn’t even being talked about by the financial press, is up 280% for the year.
Given that the cryptocurrencies are a new phenomenon, the back-end, including the infrastructure, is still being built out.
As many of us at Zacks have talked about in prior podcasts, investors can play the bitcoin mania by buying into the infrastructure including the CBOE Global Markets (CBOE - Free Report) and CME Group (CME - Free Report) , where the futures will be traded, and even with companies like Nvidia (NVDA - Free Report) .
Kevin’s Advice for New Bitcoin Traders
Kevin has been trading some of the cryptocurrencies but trading, in general, isn’t for everyone.
What advice does Kevin have for those on the outside looking in?
And how does history look on those rushing in for a piece of the pie?
Find out on this week’s podcast.
[In full disclosure, the author of this article owns TCEHY in her personal portfolio. Kevin Cook also owns NVDA.]
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>