Characteristics of a Bubble

1. A convincing idea, concept, or product. With potentials of rapid growth, and unlimited wealth


2. There are lots of excess capital in the market, or hot money "artificially created" through certain channel or policy. Once those capitals are all focused in this area, it will grow like a snow ball.


3. The idea must be simple but yet complicated. It has to be so simple until every ordinary people thinks it is a good idea, but yet it has to be complicated enough to have hard facts and data to prove it wrong


4. There are people start making money from the idea. The most attractive thing to the public is quick and easy money. It spreads even faster than virus.


5. When the bubble grows to certain extend, there will be lots of experts who come out to support and promote the bubble. Those experts are typically iconic figure, representing wisdom, authority, role model. The public believes they are modelling the highly successful people.


6. The duration of the bubble growth will last longer than expected. Those who initially pointed the danger of bubble burst will be taunted and laughed when the bubble is growing bigger.


7. It bursts.


Bubbles are well known in stock market. It happened and will happen again. However, bubble is not only limited to stock market, it can happen to anything: flower, stamps, watches, wine, oil, property, land, stones, gold, silver...as long as it is able to trigger GREED

The Story of a Cow

This is not to talk about the bullish market, it's about a story of a cow and a smart guy. 

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John just bought a cow at $100, and he leave the cow at his backyard.

1 week later, John is running out of cash. He have no choice but to put the cow up for sale. He intend to sell it at $120 to pay his debt. Unfortunately, all potential buyers are only willing to pay maximum $100 as they think the cow only worth $100.

Being so desperate for money, John came out with an idea. John register a company called Cow Technologies Limited, with the cow as the asset of the company.

John applied for IPO and managed to get approval to issue 100 shares at the price of $3 each. In total, the IPO practice will raise $300 cash for John. In John's prospectus, Cow Technologies is described as "a conglomerate operating various business units to provide solutions for food and beverage industry in local and regional market".

The IPO get strong response with 10 times over subscription. John happily receives $300 from the IPO, while keeping the cow in his backyard. On the opening day, the share price of Cow Technologies Limited closed at $3.30, 10% higher than the IPO price.

In week 1 -  $4.00
The price closed strong at $4.00

In week 2 - $6.00
Some experts start to analyze the productivity of the cow and conclude that, base on some calculation, after 3 years the number of cows will grow to 30 cows, hence the share price should worth much more than $4. Investors are encouraged and rush to market to buy at higher price. By end of the week, Cow Technologies closed at $6.00

In week 3 - $9.00
Investors visualize how many tonnes of milk will be produced by the cow and sold to the market. Realizing the value added, investors rush in to buy again. Price close at $9.00

In week 4 - $12.00
Investors heard news that Cow Technologies is forming a capable R&D team to develop a wide range of dairy products target for local market, and then export to other regions. There were also plans in setting up a factory to mass produce the dairy products. Some heard that Cow Technologies had already identified a land nearby to build the factory. Riding the strong outlook, the share price closed at $12.

In week 5 - 9.00
There are news saying the cow is old, and life span is not long. A small group of investors felt uncomfortable and starts to dispose the share. Share price retraced to $9.00. Yet most people think this is healthy correction, and its time for bargain hunting.

In week 6 - $4.00
A lot of rumors saying the cow is dying. Panic spread. More people dumb the shares. Price plunged to $4.

In week 7 - $0.50
People found that the cow carries mad cow disease, and highly possible it had infected residents in that area. Cow Technologies will be ordered to cease operation, and the factories and office will be quarantined. Further panic selling, the price plunged to $0.50!

In week 8 - $0.50
There's one crazy guy named Peter, went to visit John's house to find out what's going on. He found that John is sitting at home as usual, and cow the lazing around in the backyard. Nothing has changed. The cow is still worth $100, and the share worth $1. Peter decided to purchase the share at $0.50 from the market. Peter was laughed by other investors as being crazy to "catch the falling knife".

In week 9 - $3.00
Some people start to realize "the situation is not as bad as predicted" and start to rush into market to buy. Share price rise back to $3.

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John lives happily ever after with his cow and $300 cash. End of story.

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Nothing has changed on the cow, John did nothing to the cow. Nothing happened, except for the extra $300 for John.

While nothing happen to John and his cow, many things happened in the stock market in a few weeks. Investors had ride through a rough roller coaster, enjoying the greed, and enduring the fear.

That's why, stock market is a fun place, for investors to imagine, hope, anticipate, fear, and panic.

A joke about Share Price vs Share Value

This is a joke.

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Once upon a time in Wall Street, there were 2 traders, Mr A and Mr B.

They trade a can of sardine with each other. Mr A sells the sardine to Mr B, and Mr B sells back the sardine to Mr A, then Mr A sells it back again to Mr B.....the process keeps on repeating without end.

In every trade, each party is able to sell the sardine at a selling price higher than buy price. Therefore, this ensures each party make profit in every trade!

In the long run, Mr A and Mr B both made good money by just trading the sardine to each other.

One day, out of curiosity, Mr A decided to open up the canned sardine to see what's inside, to understand why it is worth such a high price. Mr A was shocked to find that the sardines are actually rotten!!

He was so angry and go confront Mr B for selling rotten canned sardine to him.

Mr B replied, "Why do you want to open the can??? The sardine is meant for trade only, it is not meant to be eaten!!!" 

......

Moral of the story: 


1. Stock price movement is solely based on investors recognition on the share, and the price they are willing to pay. Price may not match the value. 

2. It is all about investors' imagination and perception towards the stock.

3. A lot of times, hot stocks traded at high price are actually lousy companies, like the rotten canned sardine, until one day investors started to find out the truth, before the stock price plunged. 

4. It is about the art of avoiding buying rotten sardines

5. It is about the art of exiting the market before people realize the market is full of expensive, and may be rotten canned sardines  

6. Trading stock is just a game of trading a virtual contract, base on the market's hope, greed and fear.