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Protect Your Investments Against a Bubble, Know What Makes a Bubble

NEW YORK ( TheStreet) -- Friday on CNBC's "Fast Money Halftime Report", the gang had a discussion about whether biotechnology is now in a bubble because of how well it is done this year. The iShares Nasdaq Biotechnology (IBB) ETF is up 49% this year compared to a 23% gain for the SPDR S&P 500 (SPY).

"Fast Money" Contributor Stephen Weiss noted that the biotech industry in not in bubble territory noting the Amgen (AMGN) is trading at 15 times next year's earnings and that Gilead (GILD) is only trading at 10 times 2015 earnings estimates. He also cited the Affordable Care Act as a catalyst for earnings growth. Pete Najarian echoed Weiss' sentiment.

Simon Baker made a thin argument talking about the speculation built into current prices, essentially saying biotechs will fall more than the rest of the market when the market eventually corrects. Weiss and Najarian refuted him by sticking to the valuation argument these are not Netflix (NFLX) was blurted out in the middle of the exchange.

The conversation missed the most important point which is that bubbles are not about valuation or simply a stock or industry group being up a lot. Bubbles are about investor psychology and have widespread consequences after they pop.

In early 2008, I was on CNBC for a segment about whether solar stocks were in a bubble. I was invited on thanks to a negative article on the group I wrote for TheStreet.com. Solar stocks had been white hot at the time. When asked if solar stocks were a bubble, my reply was no they are a mania. The entire market cap of the industry was about $100 billion and I noted that if they all went down a lot in price there would be no impact on society.

During the Internet bubble there were dozens of individual companies with little to no revenue or earnings that had market caps greater $100 billion or put another way, many individual companies were larger than the size of the entire solar industry at its peak.

In thinking about the tech wreck and the housing bubble, both had far reaching consequences; the Internet industry grew to have a combined market cap in the trillions of dollars and home values affect 2/3 of the U.S. population.
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