This Is What a Bubble Looks Like

This Is What a Bubble Looks Like

by Eddy Elfenbein, Crossing Wall Street

One of the frustrating aspects of finance is the eagerness of so many to proclaim a bubble. But an investment bubble isn’t a stock rallying from 15 times earnings to 19 times earnings. Not at all. A true bubble is when valuations leave earth’s orbit — and true bubbles have been relatively rare.

Here’s a simple chart to show you how extraordinary the 1990s tech stock bubble was. This is the Nasdaq divided by the S&P 500.

In a few months, the entire relationship changed. That’s what happens when there’s a bubble. Bubbles do happen, but not very often.

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