What this means is that, like politics, the extremes in market and economic cycles get most of the attention.
This attention can be easily confused with importance.
I am not saying there aren’t opportunities on the fringe, but a less risky strategy is assuming the middle is where most long-term gains exist.
Dot.com Boom
A case in point. The dot.com boom of the late 1990s is a good example of a market extreme. While many people made money during the crazy times, many more lost huge sums.Many billions of dollars vanished in smoke as companies founded on little more than an idea with “dot com” on the end burned through cash and produced nothing.
That extreme or bubble had to fail because too many companies simply didn’t make enough money to keep their doors open. It is easy to see now that the frenzy is gone, but harder when all you heard about was the “new economy.”
There was a new economy emerging, but it wasn’t the goofy ideas behind many of the dot.com failures. The new economy was about how the Internet was integrating into and changing the old economy.
Economic Facts of Life
The old economic facts of life - a company must eventually make a profit or fail - never changed. What many investors saw was a frenzy about making easy money riding the boom.The market is almost always right, but it may not be right every day. Eventually, it will swing capital back to the center where the companies that make profits are highly valued.
Investors have ridden many different types of extremes or bubbles at various times including real estate, oil, gold, sophisticated debt instruments, futures and more.
Sooner or later the bubble bursts and capital returns to the center. One thing that is different today, as opposed to historical bubbles, is how fast they can inflate and, equally fast, burst.
If you want to play the bubbles, do so with no more than five to ten percent of your investment capital and be certain you can afford to lose it all without hurting your way of life.
