Ever been to a party that started out chill, got a little wild, and ended with someone trying to ride a bicycle off the roof?
Mom, if you’re reading this, I SWEAR I HAVEN’T.
Definitely not my parents place when they left me home alone.
Financial bubbles are a lot like that. They feel incredible on the way up, but the ending is always messy. From Tulip Mania in the 1600s to the dot-com boom, the story has a familiar rhythm. While the assets change, human nature doesn’t.
And with all the AI hype these days, now is a good time to brush up on what bubbles look like.
Understanding the pattern is your best defense against getting swept up in the madness. Economist Hyman Minsky gave us a brilliant 5-stage map for this journey.
The 5 Stages of a Mania 🎢
The Spark (Displacement): It all starts with a compelling new story. A transformative technology (the internet, AI) or a major economic shift (super-low interest rates) captures everyone’s imagination and changes their expectations about the future.
The Boom (FOMO): Prices start rising. At first, it's just the insiders. Then the media picks it up. Stories of overnight millionaires start to circulate, and the Fear Of Missing Out kicks in. The party is getting started, and everyone wants an invitation.
The Euphoria (Irrational Exuberance): Caution is thrown to the wind. Prices go vertical. Valuations make no sense, but nobody cares. The dominant mantra becomes "This time it's different." New metrics are invented to justify the insanity, and the "greater fool" theory reigns—the belief you can always sell to someone else at a higher price.
The Wobble (Profit-Taking): The smartest people in the room (the seasoned pros and insiders) start quietly selling. They recognize that the party is getting out of hand. The music is still playing, but they’re slipping out the back door.
The Crash (Panic): The music stops. COPS ARE HERE. Reality sets in, and the positive feedback loop violently reverses. Everyone rushes for the exit at once, and prices collapse far faster than they ever rose.
How to Survive the Ride
Bubbles are a feature, not a bug, of financial markets. They’re fueled by a potent mix of cheap money and timeless human emotions like greed and fear.
You can't predict them, but you can prepare for them. The goal isn’t to perfectly time the top or bottom, but to have a strategy so robust that the mania doesn’t derail your long-term goals.
Have a Written Plan: Your most powerful tool is an investment plan created with a cool head. It’s your constitution, protecting you from making emotional decisions in the heat of the moment.
Diversify: It's the only free lunch in investing. Don’t tie your entire future to a single, overhyped asset. Spreading your investments around is what protects you from a single point of failure. Tools like Fulfilled really help here.
Tune Out the Noise: During a bubble, the loudest voices are often the most biased. Focus on your plan, not the daily chatter.
Success isn't about timing the rocket ship. It’s about building a portfolio that can withstand the turbulence and keep flying long after the mania is over.
So are we in a bubble? We can’t know for sure. If we are, it’s likely in the boom stage but not equity euphoria. However, Warren Buffett’s old ratio says we’re already there:
