In theory, you can make a lot of money investing in bubbles. But you have to deal with one killer problem: when to leave the party. As John Stumpf, CEO of Wells Fargo, puts it, “It is more difficult to attend a party and leave before the trouble starts than not to attend the party at all.”
Wells Fargo is the envy of the banking sector because Stumpf refused to follow Wells’ rivals in selling subprime loans and their derivatives. It must have been tempting… but he decided it was better to be safe than sorry.
Bubbles can’t help being what they are. They expand… and expand… and expand… until they burst. When do you know for sure that an expanding bubble is about to burst? Most of the time, you don’t. At best, you’re guessing.
Investors have had a cornucopia of bubble-icious assets to invest in: securitized debt, nickel, zinc, gold, etc. But look what happened…
Lehman Brothers sold a chunk of its securitized debt for 22 cents on the dollar last month. But they guaranteed 75 percent of the sale. The real selling price? Five cents on the dollar.
Nickel was going for over $20 per pound last year. Now? It’s under $10 per pound.
Zinc has slipped 60 percent from its highs in 2007.
And it seems like only yesterday that gold was trading over $1,000.
If you stayed in those assets too long, your big money-making investments would be making you big losses instead.
I’m not telling you to never invest in these assets. This is, in fact, a good time to buy gold – even though it’s still relatively high. (Demand picks up at about this time every year.) But for nickel and zinc, the party is over. Nickel and zinc mines are being closed or cut back all over the world.
Ideally, you want to come to these parties early and leave early. If that’s too much to ask, don’t go at all. And if you don’t know what’s early and what’s late, stay away. These parties can be rowdy and make you lots of dough. But for latecomers and hangers-on, they’re guaranteed to leave you with one heck of a hangover.