Why market bubbles are unavoidable

A pilot once famously described his job as “Hours of boredom punctuated by brief moments of terror”.

Monday the 9th of March 2020 shows us how the pilot could easily have been talking about investing too. In the markets, the brief moments of terror are the rise and fall of bubbles.

I wanted to share one of the most enlightening investment articles I’ve read this week. It’s an explanation of market bubbles written by the people over at Collaborative Fund.

I like how their article doesn’t just blame greed or incompetence, but looks at the phenomenon of market bubbles from first principle. It’s a refreshingly scientific approach that incorporates everything from the laws of human nature to risk management and financial markets.

Thanks to Morgan Housel for sharing it on Twitter. Here is a good summary in his own words:

“Markets crash, have to crash, and will always crash. When you understand why this stuff happens it doesn't seem as scary when it does.”

One last thing I loved about the article is that it gets practical. They provide you with a strategy to protect yourself from the inevitability of bubbles.

I give it my personal 5-star recommendation. Give it a read:

The Reasonable Formation of Unreasonable Things