Investment bubbles are often harder to spot than people think. Sure, in retrospect it looks easy. But at the time, events aren’t so obvious. In fact, after the fact can be difficult as well.
Let me show you what I mean. Consider Amazon.com (AMZN). The stock was a classic bubble when it rose from $1.50 (split-adjusted) in mid-1997 to over $100 by 1999. Naturally, the bubble burst and shares of Amazon fell all the way back to $6 shortly after 9/11.
So we all learned our lesson, right? But hold on, Amazon slowly recovered and traded as high as $150 just a few weeks ago (absurdly overvalued in my opinion, but that’s for another time). So even if you bought Amazon at its peak during the Internet craziness, you’d still have a modest profit today while many stock investors have had no profits at all. That is, if you held onto AMZN during some very unpleasant periods. The bubbleness is relative.
Yahoo (YHOO), by contrast, closed the first day of the new millennium at $118-3/4 (fractions, remember those). The stock closed Friday at $15, so YHOO is still off by more than 87%. So that’s a bubble, right? But I don’t think the bursting is quite done. Suppose Yahoo continues to fall; that would mean we’re in a bubble right now as well. But again, the future isn’t so obvious.
eBay (EBAY) is another problematic bubble. Back in the fun days, the stock rose from $2 to $25 in a little over six months. The bubble bust and the stock dropped to $7. Yet, by the end of 2004, eBay was closing in on $60. Again, if you had held on, you would have been in the black. The stock was back down to $10 last March.
So where’s the bubble? It depends where you stand.