Lose Your Money Or Learn To Identify Asset Bubbles Article

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Lose Your Money or Learn to Identify Asset Bubbles

Many people did not see the NASDAQ tech-stock bubble. Many people did not see the Great Housing Bubble either. Those who participated in either financial mania lost a great deal of money. People need to know what to look for in order to avoid future financial manias.

Author: Robert Thomson

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A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes current pricing is justified by probable future price increases. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will continue to rise. This will convince even more people that prices will continue to rise. This facilitates even more buying. Once initiated, this reaction is self-sustaining, and the phenomenon is entirely psychological.

When the pool of buyers is exhausted and the volume of buying declines, prices stop rising; the belief in future price increases diminishes. When the remaining potential buyers no longer believe in future price increases, the primary motivating factor to purchase is eliminated; prices fall.

The temporary rise and fall of asset prices is the defining characteristic of a bubble.

The bubble mentality is summed up in three typical beliefs:

1. The expectation of future price increases.
2. The belief that prices cannot fall.
3. The worry that failure to buy now will result in permanent inability to obtain the asset.

The most recent asset bubble in the United States was in residential real estate. The Great Housing Bubble was characterized by the acceptance of the above fallacious beliefs by the general public, and the exploitation of these beliefs by the entire real estate industrial complex, particularly the sales mechanism of the National Association of Realtors.

It is imperative to identify asset bubbles because people that invest in them almost always lose money; sometimes, they lose a great deal of it.

About Author

Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Lose Your Money or Learn to Identify Asset Bubbles.

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