Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!
Charles Mackay
1814 – 1889
The other day, I was observing some young children playing with bubble solution. You remember, the stuff you had when you were a child: it came in a bottle and you used it to make bubbles.
There were two things that struck me about the bubbles. First, they were larger than I remember making as a child; I guess the manufacturers improved the solution, allowing for bigger bubbles. The other thing I noticed was that no matter how big the bubble or how high it floated, eventually the bubble burst.
Now, you may wonder why I bring up bubbles. It’s because we’ve just gone through the bursting of another financial bubble.
Just like the bubbles children make now, the financial bubbles seem to grow larger and larger. And while we keep producing bubbles, we seem to have forgotten that bubbles always burst.
There were scores of financial wizards a lot smarter than you and I who thought they’d found the Holy Grail of investing. They thought the real estate market might have slight adjustments but would never crash. So what did they do? They reduced the qualifications necessary to obtain a mortgage, thus increasing the market demand and raising the price of real estate. And when you increase demand and the supply is limited, price always goes up.
In this case, it went up too much. We had a bubble; it had to burst.
Over the past few years, we’ve had a financial crisis every ten years or so; it seems to be a cycle. And what’s disturbing is that you hear the same thing every time: this is different. It happened with the dot.com bust, and it happened with real estate. We never seem to learn.
The lesson here is twofold. If we don’t learn from the past, we’re doomed to repeat our mistakes. And you have no control over what happens; you only have control over what you do. If you start to tell yourself that this time, things are different, it’s time to run for cover.
Now, you may be thinking that this lesson only applies to financial markets and doesn’t really affect you. Not so. There are countless situations where we tell ourselves that, “This time things are different; I’m still in control.” Any time we buy into self-delusion, we’re in trouble. We do this in friendships, love relationships and many of our everyday actions.
Life moves at a faster pace now than at any time in history. And bubbles seem to be getting bigger and bigger, both on a national level and a personal level.
Just remember: bubbles always burst. Beware of the bubbles you believe in and the ones you create yourself.
What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deducted from it.
Georg Wilhelm Friedrich Hegel
1770 – 1831
Copyright © 2008 John Chancellor