Investing 101
Lesson 1: Stocks and Their Value
Investing Bubbles
"Greed run amok has been an essential feature of every spectacular boom in history," is how the textbook's author Burton Malkiel introduces the topic of investing bubbles. Many will say that the bursting of the bubble in Internet stocks happened April 2000.
The last major stock bubble was in the 1980s when biotechnology stocks were hot. History continues to prove that skyrocketing markets that depend on the support of crowd psychology will succumb to the financial law of gravitation. While unsustainable prices may persist for years, eventually they will crash.
Frequently when someone discusses investing bubbles they talk of the Holland tulip-bulb craze of the 1600s. Tulips were brought to Holland in 1593 from Turkey. They became very popular in Dutch gardens until it turned into "tulip mania." In January 1637, there was a twenty-fold increase in tulip-bulb prices, which was followed by an even greater decrease in February of that year. This started a snowball effect that soon turned to panic, bankrupting many dealers. In the end, tulip mania resulted in a prolonged depression in Holland. You can read details in the textbook about how this occurred.
In the chapter entitled "The Madness of Crowds," you'll read about other major investing bubbles such as: the South Sea Bubble of the 1800s in England, the Florida Real Estate Craze of the 1920s, and of course the bubble that ended with the 1929 stock market crash.
In this week's exercise, you'll learn how to research stocks by looking at some Internet companies and how they fared in the recent bubble burst.
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