Too many investors desperately pursue the next big investment trend, only to see it go pop.
Remember the technology bubble? It was thrilling while it inflated, and gave investors a soaking when it burst.
Learning all the wrong lessons, we have subsequently piled into one boom after another. Commercial property, commodities, and most spectacularly of all, the residential housing market, have all soared and collapsed since then. Will we never learn?
They fly so high
The pattern is the same. The newspapers suddenly notice that a certain sector has shot up, say, 30% or 40% in a short space of time.
The weekend money pages are suddenly crammed with excited articles explaining why this has happened, and how much investors have made. The underlying assumption is that that recent sky-high performance will continue.
IFAs read those articles. So do private investors. They think about it for a bit, watch the index rise further, then screw up their courage. Soon after a big wedge of money hits the sector.
Sceptics warn that the index looks a little toppy, but it flies so high that it starts to look like a new reality. Technology did. So did commodities. And of course property.
At that point, the bandwagon jumpers arrive in force. They are furious at missing the action, and hope it isn't too late to get a piece. Suckers. If things get really manic, your grandmother or paperboy tells you they are investing in the sector.
Then it falls 20%, 30%, 50%... and just as it hits rock bottom, all the Johnny-come-latelies sell up and start chasing the next bubble.
Nearly reach the sky
Private investors have an uncanny talent for buying high and selling low, and they exercise that talent time and time again.
Not that I'm being smug here. I invested in both Aberdeen Technology and Aberdeen European Technology, just weeks before the dot.com boom imploded. Reader, I was that sucker.
And 18 months ago, I defied my better instincts to put money into Gartmore China Opportunities, then the UK's best-performing unit trust. When it fell 30% soon after, I sold up and crystallised my losses. It is up 30% since March, but I'm not.
We can't help ourselves. It is in our nature. Humans may be descended from the apes, but such is our herd instinct, you would think it was cows. Or lemmings.
Then just like my dreams
And I can see two potential bubbles happening right now. Gold, for example. It beats me why people call this a safe haven. You could buy it for $250 an ounce in 1999 and people think they are weathering the recession by piling in as it tops $1,000?
The Brazilian stock market is also having a carnival, with investors celebrating returns of more than 60%. The Sunday newspapers are saying it's a great party, but parties don't last forever. If you turn up now, you might enjoy a brief samba, but it could be at the price of a colossal hangover.
They fade and die
You can't invest looking backwards, you have to look forwards.
Brave investors will rather seek bombed-out sectors and companies, rather than fully-blown bubbles. That way you can buy low, and if you're lucky, you might even get to sell high. Plenty of fund managers make good money adopting this strategy. Although plenty lose good money as well.
As ever, getting your timing right is next to impossible. I tried this strategy last year, buying TR Property Investment Trust (LSE: TRY) after the commercial property sector had fallen 30%, thinking I was getting a bargain. But what I hadn't banked on was that commercial property still had another 20% to fall. The money is now bumping along the bottom.
You also have to be prepared to take risks. You could have quintupled your money by investing in Barclays (LSE: BARC) when its share price hit 50p, but you also risked losing everything if it was nationalised.
Fortune's always hiding
Chasing bubbles may be fun but is rarely rewarding, since they tend to go pop as soon as you touch them.
A better alternative is to build a balanced portfolio of shares covering different sectors and markets. That way, wherever the next bubble appears, there is a fair chance that you will be in at the beginning, but without having too big a chunk of your wealth committed to it.
If you're really clever, you will take your profits just as the bandwagon jumpers pile in. But it takes discipline to avoid chasing all those pretty, pretty bubbles.
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