After a crazy investment bubble, people always say “Well, that was obvious… saw that one coming!” I heard people say that frequently once the dot com bubble burst. And once again when the real estate bubble burst recently.

However, it’s easy to say these sorts of things AFTER the fact. As obvious as it may seem, it isn’t. As they say, history repeats itself… and for good reason!

Bubbles are Bound to Burst

Time and time again throughout history, bubbles form and bubbles burst. What have some of the big investment/speculation mistakes been?

Dutch Tulips, 1634-1638

Tulips were a hot commodity in the Netherlands when they were first introduced during the Dutch Golden Age. So much so that families would invest their life savings into tulips. At the peak, tulip contracts were   actually selling for 10x the annual income of a skilled craftsman.

People were paying as much for flowers as they would for a home!

Key takeaway: Intrinsic values. A bubble only exists if the selling price drastically fluctuates from the intrinsic value.

South Sea Co, 1720

Has an investor (or speculator, if you will) ever told you that they need some money from you for a “sure thing” that is about to happen?

You’re not alone. In the 18th century, British bankers and government officials pushed shares of South Seas as a sure thing in order to wipe out past debts. Profits never came. Investors scrambled. South Seas’ officials went to jail.

Key takeaway: Do your research, there is no such thing as a sure thing.

California Gold Rush, 1848-1855

As soon as Gold was discovered, California’s population quickly blew up, going from 15,000 to 300,000 in a matter of years. 150,000 came over land and the other 150,000 came via ship through San Francisco and other port cities.

Something about this shiny object makes people do the craziest things, eh?

Key takeaway: If something looks like a great deal, there are plenty of other people thinking the same thing.

Railroads, 1860-1873

After the Civil War, government land grants and railroad subsidies were a dime a dozen.

When something becomes the “new” thing, hype drives investment. This did not change for railroads. Railroad stocks made up 40% of the NYSE capitalization at one point.

In 1873, this ceased to be when a financial panic called the Long Depression led to 89 of the 364 railroad lines went bankrupt.

Key takeaway: Combining the proliferation of a new technology with other factors probably isn’t sustainable in the long run.

Bicycles, 1890-1905

In the 1890’s, there was a rush to corner the bicycle market. Over 300 manufacturers were in the race. This was considered the Golden Age of Bicycles and was aided by the invention of the pneumatic tire, the rear freewheel (allowing riders to coast!), coaster brakes, and cable-pull brakes.

Then a new technology was born: the car. By 1905, 12 manufacturers were left dueling for the bicycle market.

Key takeaway: Technology is fluid. Any given product is one generation from obsolescence.

Radios, 1920’s

Radio technology, and hence Radio Corporation of America (RCA), was a huge boon to the economy. Looking at the history of RCA’s stock is reminiscent of the dot com bubble.

RCA’s stock went from $1 in 1921, which was just a few years after the company formed, to $573 in 1929. With the stock market crash came a 95% decrease in RCA’s value. And now? RCA no longer exists as a company.

Key takeaway: Wartime can create opportunity in the private market, but that isn’t necessary sustainable.

Another Gold Rush, 1974-1980

This marked an inflationary period for America. Following the Nixon Shock in 1971, U.S. citizens were also allowed to directly invest in gold for the first time since The Great Depression.

Prices were $100 per ounce in 1974 and skyrocketed to $850 per ounce by 1980. And now that the prices are even higher, then that means the prices just increased since then, right? No, gold prices dropped for the next quarter-century.

Key takeaway: Just like with the tulips, gold lost its intrinsic value once the gold standard was gotten rid of.

Japanese Assets, 1985-1990

Japan suffered what is called “Twin Bubbles.” There was a drastic increase in both their real estate and their equity prices. Japanese stocks actually quadrupled in value in that short time-frame.

In 1990, the prices dropped drastically and continued to do so until 2003. They have reached a new low with the recent downturn. When people talk about “The Lost Decade,” this is the bubble they are referring to.

And Here We Are…

And after tracing these large-scale bubbles from the past few centuries, we are brought back to the bubbles that are still fresh in our memory: The dot-com bubble and the real estate bubble. What do you think the key takeaways are?

Dot-Com Bubble, 1997-2000

Tech stocks that had never seen a profit, and some that were still pretty much in the concept stage, were seeing huge valuations. Price to earnings multiples were much higher than people were used to seeing. But the company was a .com, so it was new-age and the “rules were changing!”

Once the market collapsed, tech stocks lost 80% of their value, bringing them in line with more realistic prices.

Real Estate, 2003-2007

Our homes, which are typically conservative investments, were also wildly speculated during the past decade. With the recent collapse of these inflated home values we have seen finance firms both large and small get impacted.

Three years after the collapse and some markets are still seeing market corrections of around 10%.

More Bubbles to Come…

More bubbles are inevitable. Obviously, we do not learn from our past. In some cases, it is difficult. Quite frankly, the game sometimes changes and is hard to compare to the past.

Take right now, for example. We are potentially experiencing quite another Gold Rush! At more than $1,100 an ounce – and the obvious affirmation that the world is not ending – the question is simple: When was the right exit point for gold? Are people still buying with a potential upside? Or did the smart people already dump the investment?

Just take a look to the right. The second gold rush I mentioned in the late 70s is obvious based on the peak and bust. Are we watching a new bubble form to the right of the graph?

I also like to compare those graphs that expose an obvious awkward pricing dynamic to that of what is considered a more safe investment like Fortune 500 stocks (Example: Pepsi for the same time period).

Whatever the case may be, we are bound to see more bubbles. Hopefully, taking a look at the frequency of bubbles on a variety of different items will help you look at the market more critically.