What is a financial bubble and how does one identify it?

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I often write on Quora.com, where I am the most viewed writer on financial matters, with over 338.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What is a financial bubble and how does one identify it? Why is it so difficult to take advantage of bubbles?
  • How can you keep to New Year’s resolutions?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Source for all answers – Adam Fayed’s Quora page.

What is a financial bubble and how does one identify it?

There is something called the shoe-shine boy indicator.

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It goes back to the Great Depression. One of the few people who sold out in 1929 got spooked after the guy shining his shoes started talking about stocks and was giving tips.

Most people find investing boring. In normal situations, very few taxi drivers, teachers, doctors or shoeshine boys want to speak about stocks, let alone give tips.

In times of market dips like 1929 or 2008, even fewer people want to speak about stocks, despite the super low prices.

In comparison, if speaking about financial assets becomes a regular feature of the system, that is a bad sign. It is a sign that greed has taken over.

The only exception is maybe property because in some cultures quite a few people are permanently obsessed with property talks at a dinner party.

In recent times, we can’t see the majority of people getting obsessed with the overall market like the S&P500, FTSE100, or another index.

What we can see is people talking about certain individual technology stocks like Tesla, in a way that hasn’t been seen since the 1990s.

What is more, a lot of people are also talking about crypto. Coins like ones which are linked to Squid Games, or some other new trend, are soaring by hundreds, or even thousands of percentage, in a week:

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This brings me to another point. In a bubble, people don’t focus on the fundamentals.

They just chase higher prices and often are short-term in outlook, rather than buy and hold investors.

Bubbles are best avoided however this basic fact when it comes to stocks:

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The major stocks markets have gone up for hundreds of years, but not in a straight line.

Even in the unlikely case that you have identified a bubble, it is highly unlikely that you will be able to outsmart everybody by short-selling or keeping your money in cash to buy the drip (market timing).

The majority of sensible long-term investors, therefore, do two things to reduce risk:

  1. Asset diversification. Don’t put all your eggs in one basket.
  2. Time diversification. Keep investing for the long-term, with regular injections, to make any market falls irrelevant in the long term.

One of the reasons why time in the market beats timing it is that most of the returns from stocks have traditionally been in a few days.

Let me give you this simple example. If your grandma would have invested for the last 100 years ago and not timed the market the return would be over 22,100%.

That is a return of about 6.7% after inflation. If, however, she would have missed the ten worst days every decade, the return would increase to 4,7100,000%!

Sounds fantastic right?

There are two problems:

  1. The worst 10 days of every ten-year period is scattered. It is like trying to find a needle in a haystack. The falls happen at the most unexpected of times.
  2. Now let’s say you still try to time the market and miss the ten best days of every ten-year period. That 22,100% return would fall to around 62%! Like the ten worst days, the ten best are also scattered like needles in a haystack.

Too many people think they can find the needle in the haystack, rather than being happy with a decent, albeit, volatility, return.

So, rather than trying to identify a bubble, just stay away from the mania and don’t try to take advantage of one either.

How do you stick to your New Year’s resolutions?

This isn’t just for New Year’s resolutions, this is for goal setting in general:

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I have found the best ways are:

1. Don’t rely on willpower alone as it wanes over time. Finding the motivation to go to the gym on January 2 is easier than on February 2.

Instead, focus on making the change easier by utilizing the path of least resistance. For example, do you want to drink less?

Then throw out all the bottles or put them in the cellar rather than on the kitchen table. Want to save and invest more? Put in a direct debit one day after you are paid so it is automatic

2. Take baby steps

It is better to get something started and make the goal very achievable than to overshoot.

Once you achieve a very achievable goal, then you are more likely to “get greedy” and want more.

Most people who make a lifestyle or financial change started slowly and built up over time.

80% of failures are just not getting started to begin with.

3. Find a better network

It isn’t easy to make changes if people in your network don’t support you properly. Toxic people will keep you down.

It is best to find the people who you want to be like. If you want to be healthy, spend more time with healthy people.

If you want to be wealthy, try to spend more time with self-made wealthy individuals.

What is more, if you share your goals with positive people, you can be accountable and push each other.

4. Don’t give up

Persistence is often more important than patience or hard work alone, as persistent people will try many different tactics.

5. Limit the number of goals

You are more likely to keep to just attending one or two goals, rather than five.

6. No excuses

There are always reasons not to do something. “Now isn’t the right time”. “I am too old/young”.

There are loads of excuses but usually, where there is a will, there is a way.

And FINALLY, remind yourself of the emotional reasons for making changes. Humans are procrastinators by nature.

We delay things that we know we should do. We are less likely to do that if we are trying to help our kids, ageing parents or to avoid a painful future experience.

For instance, if you are trying to save and invest more, you are more likely to do it if you link it to an emotion such as avoiding poverty in old age or helping your kids or parents.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 694.5 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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