When the prices of virtually all commodities spiked rapidly in late 2008, many investors took note. While investing is often about noticing a product or service offered by a business that is catching on with the public in a big way, commodities are not. But when prices began to rise across the board, commodities seemed like the next closest thing to a sure bet. Money began to pour en masse into the area. And just like dozens of price bubbles that have come before, that one too saw the usual pattern. New money flowed in, while the experienced players goaded on the new people, claiming that prices were in a new paradigm.
Most bubbles related to assets are similar in that people need to believe, across the board, that a new paradigm is occurring. Get on board too late, the story goes, and you’ll be left behind. Not only left behind, but be poor, pitiful, and appear blind in the process. No one wants to be that person, so people step aboard.
At first, people are hesitant. But then they make a few percentage points, quickly and beyond any former hopes of a standard investment return. They are convinced of their own genius, and commit more funds to the bubble at hand. Then, the ugliness of bubbles occurs, just as it did with the 2008 commodity bubble. As more and more inexperienced people committed their funds to the mania, the experienced hands said good things about the market, while simultaneously selling their ownership stakes. Soon thereafter, the bottom falls out of the market, and those wise old hands re-enter at much lower prices.