A bubble is one of those words everyone uses often, but rarely does anyone define it clearly.
At its core, a bubble is when the price or attention around something moves far ahead of its underlying value. It can be a stock or equity, real estate, a technology, such as the internet boom, the railroad boom, or an idea. The gap between reality and expectation keeps widening until it can’t.
Bubbles are not purely irrational. They usually start with something tangible. A genuine shift, a new capability, and a fundamental problem are being solved. What makes them dangerous is not the idea itself, but how people behave once momentum builds.
That’s why understanding bubbles is both a science and an art.
Two Kinds of Bubbles
Not all bubbles are the same.
Some bubbles, even after they burst, leave behind lasting value. The dot-com era is a good example. Many companies failed, and valuations collapsed. But the internet, digital payments, cloud infrastructure, and online commerce didn’t disappear. They became the foundation of how we work today. Similar to the railroad observed with the road boom in the automobiles, the automobile boom occurred in the mid-1900s. The bubble accelerated progress.
“History Doesn’t Repeat Itself, but It Often Rhymes” – Mark Twain
Other bubbles are mostly speculative. They exist because prices are rising, not because value is compounding. People buy because someone else will buy at a higher price. When the excitement fades, very little remains.
When evaluating a business, a technology, or an industry, the first question is not “Is this a bubble?” Instead, the real question is “What kind of bubble is this?”
The Human Layer: FOMO
Most bubbles don’t turn extreme because the idea is bad. They turn extreme because people are involved.
At some point, logic gives way to the Feeling of Missing Out (FOMO), and emotions kick in. People stop asking, “Is this valuable?” and instead start asking, “What if I miss this?” Small, calculated bets turn into oversized ones. Risk stops being measured. Prices get disconnected from fundamentals merely because human behavior amplifies them far beyond reality.
This phase matters. Because once FOMO dominates, even good ideas can become bad investments at the wrong price.
Investing in Bubbles: Knowing the Game You’re Playing
As an investor, recognizing the type of bubble tells you how much you can bet.
If it’s a purely speculative bubble, that’s fine, as long as you treat it like speculation. You put in only what you’re willing to lose. You don’t confuse luck with skill. You don’t bet your future on it.
If it’s a bubble driven by fundamental economic or technological change, the thinking is different. You may still lose money. Some companies will fail. But there is a deeper satisfaction in knowing you are part of progress. Someone has to take those early risks for society to move to the next orbit.
The key is honesty. As long as you know what game you’re playing, you don’t fool yourself.
Risk: Not Just Money, But Credibility
Most people think only about financial risk. That’s only one part.
There’s also a credibility risk. If you chase every new trend blindly, over time, people stop taking you seriously. More importantly, you stop trusting your own judgment. Permanent loss of capital hurts. Permanent loss of self-respect hurts more.
Good investing is not about avoiding bubbles. It’s about not getting burned by them.
Asking the Right Questions
To identify what kind of bubble you’re in, a few questions help:
- What real problem is being solved here?
- Will this still matter even if prices fall by 50%?
- Are we seeing steady execution or just rising narratives?
- Who is buying this and why?
These questions don’t give perfect answers. But it provides investors with a breathing space and allows time to think and evaluate. This slowing down is often enough to avoid big mistakes.
Evaluating the People Behind the Story
This is the most crucial step. Look closely at the people involved.
Do they have a track record of building things, or do they jump from one trend to the next? Are they focused on execution, or mostly on fundraising and storytelling? Have they stayed with complex problems when excitement faded before?
People who build quietly during boring phases usually survive after bubbles burst, but fly-by-night players are predominantly speculative in nature and want to keep moving to new things. This is where credibility shows up.
Consistency matters far more than intensity.
Closing Thoughts
History has taught us that bubbles are unavoidable and part of how progress happens. The real skill is not predicting when a bubble will burst. It is recognizing what remains valuable after it does and sizing our investment bets accordingly.
As long as you know what game you are playing, bubbles don’t have to burn your hands.