Bubbles, crashes and why they keep happening

Every bubble in four hundred years has had the same shape, because every bubble is made of the same material: people, and their fear of missing out. The assets change. The chart does not.

The phases, and what they feel like

The cruelty of the cycle is that the emotional signal is exactly inverted from the correct action. Maximum comfort occurs at maximum risk. Maximum terror occurs at maximum opportunity.

Accumulation

Prices are low, coverage is negative, and nobody wants to talk about it at dinner. This is when the returns of the next decade are quietly being locked in, by people who feel foolish doing it.

Belief

Earnings genuinely improve. The story is true. Prices rise for good reasons. This is the healthiest phase, and, awkwardly, the hardest to distinguish from the beginning of the next one.

Mania

Valuations detach from earnings. New metrics are invented to justify prices ("eyeballs", "community", "total addressable market"). People with no interest in the subject start trading it. Someone tells you it is different this time. It is not different this time. It has never been different this time.

Denial, then capitulation

The first fall is called a healthy correction. The second is a buying opportunity. Somewhere around the third, people stop buying the dip and start selling to make the pain stop. That surrender is where the next cycle begins.

The moment of greatest danger is the one that feels safest, because feeling safe is what happens after everyone has already bought.

What you can actually do

• Do not try to time it. Bubbles run far longer and far higher than any reasonable person expects. Being early is indistinguishable from being wrong, and it costs the same.
• Do control your exposure. When valuations are extreme, take less risk. Not zero risk, less risk. Rebalancing does this automatically, without requiring you to have an opinion.
• Do write down why you own things. In the panic, your notes from the calm are the only trustworthy voice in the room.