Continue reading...In almost all instances, the root cause of a financial crisis is an asset bubble. But how does this bubble form, what finally causes it to pop and how can investors profit before it goes bust?
In order for a market to attain the excessive valuations necessary to prompt a crisis, a prolonged period of price appreciation combined with a large number of new entrants to the market is usually necessary.
Crisis in the MakingThe combination of price appreciation and an increase in new entrants to the market are defining characteristics of market bubbles. Investors should remember that many bubbles are based on attractive fundamentals, which explain why money flows into the market in the first place. However, at some point, so much money flows into the market that valuations exceed even those justified by attractive fundamentals, signaling the end of a bull market and the beginning of a bubble. Bubbles are fueled by the collective greed of investors. When this greed turns to fear, a...
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