This is the second of the “lessons” I’ve learned from watching the various market bubbles (or foams and frothys or whatever you want to call it) and I’m putting these out there in the hopes that we can throw stones at these ideas. The second lesson is much like the first, somewhat common sense, but is worth mentioning because sometimes folks act irrationally and oftentimes forget it.
Lesson #2: All Markets Move In Cycles
If you’ve taken any economics courses, you know that many markets are cyclical. You also know that the probability of getting heads when you flip a coin is 50%… but if I flipped a coin 10 times and it’s come up tails, are you still confident it’s 50-50? Answer honestly. Why do you think the roulette wheels in casinos come with a ticker that gives a history of the table? The bubbles you’ve seen come and gone will come and go again. Recognize the signs and try to sneak aboard the train the next time it comes to the station.
Gold was $730 three weeks ago and it was $850 in January of 1980.
Oil has moved up and down considerably even in the last year, let alone historically. It was over $74/barrel in early May, then fell to as low as $58 in February, was as high as $68 in January, right after climbing from a low of around $56 in November 2005, after reaching a peak of $70 in the heart of August 2005. A full year ago, oil was less than $48/barrel.
The stock market tanked in 2001 when the dot-com bubble exploded and was within a few sniffs of those highs in May of 2006 (before it took a nice little punch to the gut to calm us all down).
The only caveat to this lesson is that you have to remember that while the market is cyclical, specific parts of it may not. JDS Uniphase is still in the basement even though the Nasdaq has recovered. And there were a lot of dot-com bankruptcies that will never come back… but you have seen blockbuster Web 2.0 purchases as of late (Yahoo bought Flickr , AOL bought Weblogsinc , Ask.com bought Bloglines , News Corp bought MySpace , blah blah blah) and wonder if another small bubble is forming?