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Stocks in a bubble?

Several renown investment advisors are calling a bubble in stocks.  Yet few Americans seem to care what people with hugely successful track records are saying.  Stocks are going up, why not get on board?

A bubble occurs when assets are valued at prices that are out of touch with reality, always on the high side.  Bubbles have occurred in many different assets, perhaps the most famous – and most ludicrous — being the Netherlands’ tulip mania in the early 17th century.

This generation has seen two bubbles, the first being the dot-com bubble of the 1990s when IPOs (initial public offerings) rose to hundreds of dollars a share even as some companies had never turned profits.  Worse, some dot-coms never sold anything, yet their stock prices soared.  The dot-com bubble burst in 2000, and the NASDAQ, on which many dot-coms traded, lost more than half its value.

But, the most painful for most Americans was the housing bubble of the 2000s.  Prices burst in 2006-2007, and millions of Americans lost their homes.

Always, bubble bulls – those that continue to buy and recommend that others do the same – come up with reasons why assets are not in a bubble. In the dot-com bubble, it was the unlimited potential of the Internet.  In the housing bubble, we were told that housing prices never go down, primarily because of our growing population.  Bubbles eventually burst, wreaking havoc on investors.

Sadly, main street America doesn’t have a good track record for making money in stocks and rarely recognizes a bubble.  Average investors tend to get in at the tops when greed abounds and get out at the bottoms when fear takes over.  The strategy of selling overvalued assets and buying undervalued assets is rarely employed by average investors.

Currently, stocks are overvalued or at least highly-valued by just about every indicator.  Gold and silver are undervalued by about every indicator.  Yet at CMI we regularly see sellers of metals have their proceeds wired to stock brokerage firms.

There is no way to pick the absolute top in a bubble.  But, when optimism is universal, you probably won’t regret moving at least some of your assets from bubble investments to undervalued assets.  If you own stocks, consider converting at least some to gold or silver.

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