Jun 24, 2010

Why Bubbles continue to create?

Why Bubbles continue to create?
People’s memory is short term and they forget how last bubble was formed and prickled.
The sure beneficiary from a bubble like brokers, analysts, corporate wants the bubble. Because simply their profit increases in such periods and decreases when bubble busts or absence of it.

New players:
Every time there are several new players (investors, students, analysts, brokers, fund managers, mf company, foreign financial company, new FIIs, traders etc.) who enter in markets. They generally do not have any past market (bubble) experience and hence no institutional memory.
People with memory and experience have lost in earlier bubble and now out of market.
A big class of so many people with memory and experience start taking things for granted. They either have learned that bubbles do get created and prickled or have become habituated of bull market and bear markets. That is why they do not react rationally and joins the market in way it goes.
Every time different themes are contended for bull markets, but one argument is repeated: and that is ‘it’s different this time’.
Yes, many things may be different because we live in a world of fast changes. But the reality is that greed, fear, behavioral anomalies, and mental heuristics remain the same. Excesses are the same.

The govt. helps:
The govt. always likes the stock market go up. It presents good image. No govt. like a depressed and doomed stock market as it is perceived as a barometer of nation’s economy. So govt. always supports the rising markets and hence supports bubble formation as well. Has ever govt. said ‘all right, its 20,000 index, it’s enough now!’No. you have seen govt. trying everything if markets become nervous. From giving statements, to declaring policy measures and so on.

We mentioned excesses are the same every time in bull bubble or bear depression.
Several behavioral heuristics behind such happenings are,
The herd mentality
Confirmatory bias
Representative bias
Recency effect
Endowment effect
Instant gratification
The greater fool theory
The winners’ curse
Availability bias
Herd mentality
Rationalization trap
Over-simplification bias
Growth investing
Fancy of new
And so on

Money flow of other markets-
When prices are rising in some markets speculative money will start flowing into that market from other markets to take benefit of rising prices/bull market. This it fuels it.

Floods of IPOs that too at scorching high valuation are a sure sign of bubble as well part of bubble making process. If the IPOs come at reasonable valuations why would bubble come up? Investors will never touch 20+ and triple digit PE stock in primary markets, and thus no bubble would arise. If this could happen then IPOs would continue to come at any time a company wants money or want to raise resources and not only a bull market! IPO market could become an all-season market if they used to come at good valuations and returns on table for investors. But this doesn’t happen. So thus IPOs invariable helps bubble formation and an integral part of bubble formation process and bubble phase.
In fact to repeat- Floods of IPOs that too at schorching high valuation are a sure sign of bubble.

They help bubble formation and expansion in that increasing speculative activity and shares to trade on exchanges.
IPOs/Primary markets are a important segment of trading and speculation. God know of investing! Si they invariably are part.


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