Bubbles & Crashes

The most dangerous four words in finance are “this time is different” — and they appear in every bubble, because the psychology is always the same even when the asset changes. BubblesPrices detached wildly from value by mania, before a crash. inflate through a recognisable sequence: a genuine new development (a real technology, reform, or story) sparks optimism → prices rise → rising prices attract more buyers (greedThe two emotions that move markets and ruin accounts., FOMOFollowing the crowd — most dangerous at the extremes.) → the rise becomes self-reinforcing, detached from fundamentalsValuing a company from its business and financials. → euphoria peaks as the public piles in with leverageControlling a large position with a small amount of money., dismissing all caution with “this time is different” (new-era thinking that justifies any price) → then something cracks, sentiment reverses, and the same leverageControlling a large position with a small amount of money. and crowd that inflated it now rush for the exits, collapsing prices far faster than they rose. The warning signs recur: parabolic price rises, valuationsEstimating what an asset is worth. divorced from earnings, mass retail participation and leverage, ridicule of skeptics, and the pervasive belief that old rules no longer apply. The deep lesson: “this time is different” is never true at the level that matters — the specifics change (tulips, dot-coms, crypto), but human greedThe two emotions that move markets and ruin accounts., herding and the mechanics of mania→crash are constant. You can’t reliably time a bubble’s burst (they run longer and higher than seems possible — “the market can stay irrational longer than you can stay solvent”), but you can recognise bubble conditions and protect yourself: avoid leverage, don’t bet the farm on the mania, and remember that what goes parabolic almost always crashes.