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Investment Bubble - Personal Statement Example

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Summary
Investment Bubble Introduction Investment bubble is now a well known phenomenon that has taken place in various classes of assets such as real estate, stock market or bullion market throughout the world. When a particular class of investment performs extraordinarily well, it draws attention of variety of retail investors…
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Investment Bubble
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Investment Bubble

Download file to see previous pages... Virtually, a spiral sets in with more investment coming through causing more escalation in price of the said asset. Within few months price soars beyond imagination of all and the level of rationality. Even at this level, buying keeps supporting the price. Those who were not the part of this boom feel like having missed the bus and decide to plunge into it with all available resources. Soon, price reaches to a level, which cannot be justified by any of the known established investment theories even after discounting all future cash flow streams in a most optimistic scenario. Such a level of price cannot be sustained for a long period of time and discerning speculators start unloading at the peak of the heat. Price starts falling quickly and gullible retail investors who are in thousands cannot fathom that ‘bubble has burst indeed’ and hold on to their investment causing them insurmountable loss in the asset wiping their most of the capital. It will be worth exploring and to live some of the investment bubbles in a different class of assets across the world before identifying the key issues involved with an investment bubble versus a long term investment. Japanese Stock Market Bubble It will be interesting to track the movement of Nikkei 225 between the period of 1983 and 1991to understand how did the stock market burst eventually. The index which was hovering Source:http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225 around 8,300 in 1983 peaked to more than 38,000 in December 1989. The boom period continued for almost 6 years giving a stupendous rise to the stock price. For many, it was a great period of investment giving them return of 500% or more. However, the bubble burst after that and index came down crashing to nearly half at 19,000 within a year. It plunged further down to 14,000 by third quarter of 1993. The most tragic part is that the exactly after 20 years Nikkei touched the same level of 8,300 that is where it started off in 1983. It was a complete reversal and complete washout of investment. (Japan Nikkei 225 2011) Investment Bubble versus Long Term Investment Above incident raises several issues worth contemplating. A common understanding among investors is that the investment always rises with time and with the expansion of economy, but here a totally different phenomenon has surfaced. Anyone who invested in Japanese stock market in 1983 and stayed with the investment until 2003 virtually had no return on his or her investment though it may be termed as a long term investment without resorting to any speculative activity. Investor is back to square one. This certainly defies the theory that a long term investment always pays. Japan has certainly progressed between 1983 and 2003 that is evident from the GDP figures. In 1983, Japan’s GDP was $10,987.22 (Japan GDP - per Capita 2011) in terms of purchasing power parity point of view which grew to $33,884.84 in the same terms. It is true that the bubble has burst but how to justify the same valuation even after 20 years. This indicates that the rise and fall of the investment is not always linked to the time and economic expansion in general. It is a quantum of the money chasing targeted asset plays a pivotal role in the appreciation of an asset. Bubble in Precious Metal In another class of asset namely Gold, the situation is again not much different. During economic or ...Download file to see next pagesRead More
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