The Stock Market, A Long History Full of Bubbles

The Stock Market, A Long History Full of Bubbles

The history of the stock market is like the history of mankind, littered with at least a dozen failures for every success. Trying to work out the mechanics of the stock market to pick the winners is the work of countless analysts and so called experts. The truth is that, as Warren Buffett eloquently expressed it, in business the rearview mirror is always easier to see through than the windshield.

Trying to work out formulas to describe past events in order to predict the future is a great way to invest as long as you do not expect to get it right all the time, or not even half the time. If we are to learn anything from the history of the stock market it is that it is only when the tide changes that people realize they were swimming naked the whole time.

Nothing describes this better than looking at the bubbles and meltdowns of the last hundred years. There are different ways to see bubbles, just as there are different ways to view life. Some analysts associate bubbles with herd behavior and groupthink, both of which exchange creativity, intelligent discussion and critical analysis for political correctness and consensus thinking. Of course, these kinds of comments are often made with the benefit of hindsight.
Others argue that bubbles, and their eventual bursts are a rational consequence to the intrinsic and highly contagious forces that control the market, namely greed and fear. The truth is anyone’s guess, as nobody can really claim to understand the market completely.

This does not mean we should not try. Predicting financial trends and the stock market behavior is a worthwhile endeavor that is much more advanced than many think. The problem is that, as it so often has happened in the history of mankind, we simply choose to ignore the writing on the wall. Take for instance the current financial crisis, it was predicted by a surprisingly long list of market analysts including Peter Schiff, Ron Paul, Nouriel Roubini, and half a dozen more experts that were able to see what we all chose not to. Complacency is a huge enemy of any business, especially those that control huge amounts of money. Quoting again from Warren Buffet, “the chains of habit are to light to be felt until they are too heavy to be broken”. It is easy to fall in the reasoning that whatever worked, or happened in the past will continue to do so.

A quick look at the history of the stock market will show us that bubbles come and pop with the appearance of new technology, scientific discoveries and geopolitical factors. Take for instance, US Steel. It is currently the 10th largest steel producer in the world, and still the largest in the U.S. When it first started in 1901 it was priced on the Stock Market at 1.4 billion. This was the first billion dollar corporation in the world. Following the ups and downs of US Steel’s stock is like reading an illustrated book of modern history. Its stock price peaked during the Second World War, when it had over 340,000 workers, by 2000 it had under 53,000 on its staff. In this case the catalyst of the steel industry bubbles were the nationwide creation of railroads in the early 1900’s and the need of steel for World War II.

The history of bubbles is constantly following the steps of changes in geopolitical circumstances and advances in science and technology. Take for instance the Great Depression of the 1920’s that followed the introduction of a whole new world of technological innovations like the radio, cars, and airplanes. This was an era of unparalleled opportunity and progress, but it got out of control when speculators got a little too greedy.

The dot.com bubble of the 1990’s similarly followed in the footsteps of the internet and new e-commerce capabilities. The expectations of this new technology were not backed by real assets and created a speculation based crisis that shook the entire industry. Something similar occurred with the credit and housing crisis we are now experiencing. The expectations created by the easy credit of the 2000’s made it possible for everyone to live above their expectations creating a debt culture that finally hit reality with a bang.