The Markets Are Forever Blowing Bubbles

NEW YORK (TheStreet) -- There are always bubbles. There are bubbles in individual stocks, in sectors, in countries, in types of assets and in whole markets.

We are forever blowing bubbles because investors have a herd mentality. We follow what works, and it usually keeps working past where it should. The market isn't rational.

Whenever prices go beyond reason, the Cassandras come out. I was once one of those Cassandras.

Back in the late 1990s, I ran an online newsletter that warned repeatedly about how "clueless" many in the e-commerce space were. I wrote that Internet stocks were in a bubble, and about how it was about to pop.

It finally did pop. I think the final straw was the merger of AOL ( AOL) and Time Warner ( TWX) in early 2000. AOL shareholders got 60% of the resulting equity, which in retrospect seems laughable. More important, that deal put an upper limit on what Internet stocks might be worth and, having seen a ceiling, prices went to the floor.

But the dot-bomb, as I called it, buried some bargains. In early 2000 Amazon.com ( AMZN) was a bubble stock, peaking during December 1999 at nearly $107 a share. It's now trading for more than $310. Priceline ( PCLN) finished 1999 at a split-adjusted $284.26 after briefly breaching $900 (split-adjusted) earlier that year. Last week it was worth more than $1,050 a share.

Am I saying you should buy Amazon and Priceline? No. I'm saying that some stocks can survive a bubble if their management has a long-term vision and the discipline to execute on it. That's the way business, as opposed to investing, works.

Thus bubbles, and busts, have little to do with fundamentals for managements that have what I would call A Clue. A wise manager will look beyond the market's horizon, focusing on the long-term plan, and will not deviate. Amazon had a plan for dominating the infrastructure of e-commerce, including the computing infrastructure underlying it. Priceline had a plan for dominating travel.

Stocks that are a reasonable investment proposition in the long run can easily create bubbles in the short run. Netflix ( NFLX) was, two years ago, rightly called a bubble by Rocco Pendola. The same was true with Apple ( AAPL)) a year ago. Both have taken their investors on wild rides since, but both are coming good.

Is Tesla ( TSLA) currently a bubble stock? Based on fundamentals, right now it certainly is. Will Tesla be worth more than it is today in five years, or 10? I think so, but now is probably not the right time to buy. Wait for the speculators to be washed out, then come in.

Whenever values come unmoored from fundamentals, you have a bubble. What makes it worse, from that point, are those buy-side analysts telling you to ignore those fundamentals, and pointing to the most recent gains. What's even more infuriating is that they're usually right, for a time.

It's the reaction to such commentary that should tell savvy investors how to behave. When negative stories are seen as the normal give-and-take of a market, that's one thing. When the authors are criticized directly, or their motives get questioned, that's A Clue that the bulls are running out of arguments.

This excess bullishness can happen to anyone.

Joseph P. Kennedy famously got out of stocks when his shoeshine boy gave him a stock tip. James Kostohryz used this story while calling gold a bargain at $1,700/ounce, in August of 2011. Gold is now at $1,320.

Does this make Kostohryz a fool? No, it does not. Because he wasn't suggesting you sell all your stocks and just buy gold. Diversification, among asset classes as well as stocks, remains the key to long-term investment success.

Remember, though, you're not in business. You're an investor. You can root for investments the way you do your favorite sports team, but if you fall in love with one you're going to get burned.

What investment pros constantly harp on, portfolio re-balancing, is the right idea but often done poorly. The idea is not just to have assets across a wide front, but to take profits from areas that have become unmoored from fundamentals and apply them in areas that are currently undervalued.

What if everything is overvalued, you ask? Everything is never overvalued. Investing wisdom lies in knowing there are always unloved assets worth adopting, and adopting them. Then, when everyone else falls in love with them, slowly and quietly step away.

At the time of publication, the author owned 80 shares of AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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