From 1986 till 1991 Japan witnessed a bubble economy: its real estate and stock prices were greatly inflated. A bubble is created when uncontrolled money is supplied and market experiences credit expansion. This situation leads to over confident speculation assets and stock prices due to eased money supply policy at that moment.

A ‘’financial bubble’’ refers to a situation where there is a relatively high level of trading activity on a particular asset class at price levels that are significantly higher than their inherent values, or built-in values. In other words, a bubble occurs when certain investments are bid up to prices that are far too high to be sustainable in the long run.

The 1990s saw ‘’technology bubble’’.  Many new dotcom companies were floated in market, and their stocks (share) were bid up to extremely high prices in a relatively short period of time. This bubble was so crazy that even companies that were infant start-ups and had yet to produce actual earnings were bid up to large market capitalizations by speculators attempting to earn a quick profit from the bull market in the technology sector. By 2001 however, the technology bubble burst and many of these formerly high-flying stocks came crashing down to drastically lower price levels. Bubbles at time are insane, and they crash down rumbling.

Another noteworthy bubble was the ‘’housing bubble’’ that occurred after the technology bubble; this was characterized by an initial increase in housing prices due to fundamentals; the fundamental can be described as often, homeowners make the harmful error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation. As the bull market in housing continues, many investors begin buying homes as speculative investments, and this unsustainable run-up in housing prices eventually come crashing down badly. The United States housing bubble was responsible for the ‘subprime crisis’, which affected over half of the United States. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.

A real estate bubble is a type of economic bubble that occurs periodically in local, regional, national or global real estate markets. In the stock market, booms are associated with bull markets (where investors are optimistic that stocks will go up) whereas the busts (break) are associated with bear markets.

What is a ‘Boom’? Stocks that suddenly become very popular and gain strong, elevated market profits are the result of a stock boom. A company or industry boom results in an increase of output, jobs and investment in that industry. Certain events can be citywide or nationwide booms for business activity, such as hosting the Olympics, which translates into capital investment, TV broadcasting deals, sponsorship deals and tourism. For example, TV broadcasting revenue alone was projected to be $4.1 billion for the 2016 Summer Olympics in Brazil.

On the other hand, a downturn in a particular industry or financial sector can result in a bust for an entire city or state, especially if the region has invested too heavily in that industry or sector. Arizona and Nevada are currently mired in an economic slump because they were hit hardest by the real estate bust due to the subprime crisis of 2007-08.

Booms are not essentially sustainable; but when they end, things level out, the industry experiences a minor setback. When a Bubble ends, a significant number of people experience serious economic hardships. That’s the difference between bubble and boom. Okay, a boom is what you call a bubble before it bursts.

On a serious note, a bubble is a situation when one particular thing becomes overvalued. Think back to the 90’s. There were some really successful internet start-ups like Google, Amazon, Ebay, etc. Investors went absolutely insane giving any idiot with an internet company a ton of money to invest in their business. Those businesses became worth a ton of money overnight. Eventually, people realized that many of those companies were not particularly profitable, and pulled out their money. It was a kind of the bubble burst. Overnight those companies went from being wildly expensive to be being completely valueless.

A boom on the other hand is a normal thing. It is like there is a huge demand for a product such as herbal products, especially in towns where there are no herbal product shops; the marketer expands demand for the products through shops from other town. Everyone loves the product, so the demand increases hence many other herbal companies also open shops. This part is the boom. The post–World War II economic expansion, also known as the post-war economic boom, the long boom, and the Golden Age of Capitalism, was a period of economic prosperity in the mid-20th century which occurred, following the end of World-War II in 1945, and lasted until the early 1970s.

Economic booms are helpful for market expansions. Expansion Strategy is adopted by organizations when they attempt to achieve a high growth as compared to its past achievements. For example, let’s talk about one restaurant owner who grew his business by adding a private catering service. He also adds a third dimension of selling signature dessert items through local grocery stores. Fourth – he adds a grocery store of his own to his business expansion.

The cyclical nature of the market and the economy in general suggests that every strong economic growth happens in bull market which follows by a sluggish low growth bear market. Usually bubbles start with some good economic reasons.

Some factors that cause bubbles:

Illogical enthusiasm: In certain circumstances, investors buy assets because of strong psychological pressures which encourage them to ignore the fundamental value of the asset and believe that prices will keep rising.

Herd mentality: People often assume the majority can’t be wrong. If prominent and well-established financial leaders are buying, they assume it must be a good investment.

Short term perspective: People make decisions based on short term thinking rather than the long-term.

Adaptive expectations: People often judge the state of a market and economy by what has happened in the recent past. They hope they can beat the market and hence they decide to buy and then get out before the bubble bursts.

Cognitive dissonance: It refers to filtering out bad news and looking for views which reinforce our beliefs. People often do it; they look out for views from market which suits their pre or post buying decision.

Warren Buffett

While studying his graduate studies at Columbia, Warren Buffett was the only student ever to earn an A+ in one of Graham’s classes. But, both Ben Graham and Warren’s father advised him not to work on Wall Street after he graduated. Warren Buffett was so determined to start his work soon after graduation that he offered to work for the Benjamin Graham’s partnership for free. Ben turned him down. He preferred to hold his spots for Jews who were not hired at Gentle/goof firms at the time. Warren was crushed. Returning home, he took a job at his father’s brokerage house.

Graham, who is well known as Warren Buffett’s mentor, learnt his investment lessons with many obscurities; his losses in the stock market crash of 1929 and the subsequent bear market during the Great Depression led Graham to sharpen his investment techniques. These techniques sought to profit in stocks while minimizing downside risks. He did this by buying shares of companies whose shares traded far below the companies’ liquidation value. In simple terms, his goal was to buy a dollar’s worth of assets for 50 cents, and he did that very well, both in theory and in practice. There were two general ways that Graham used to do this. The first method was the use of market psychology; that is, using the fear and greed of the market to earn profits and the second was to invest by the numbers.

Like his mentor, Warren Buffett restricts himself to businesses he can fairly understand and analyze. Investment success is not a matter of how much you know but rather how sensibly you define what you know and what you don’t know. Buffett considers this wisdom of understanding for the operating business. It is a prerequisite for a feasible forecast of future business performance. After all, if you don’t understand the business, how can you project performance? Buffett’s each business beliefs support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has positive long-term prospects or not.

Warren Buffett has amassed a personal multibillion dollar fortune mainly through investing in stocks and buying companies through Berkshire Hathaway. Shareholders in Berkshire Hathaway who invested $10,000 in the company in 1965 are above the $50 million mark today. Now in his 80s, Warren Buffett has yet to write a single book, but among investment professionals and the investing public, there is no more respected voice.

His advice to the world of investors is very straightforward “be wise while investing but don’t fall in love with your stocks” In one of his interviews on CNBC which lasted for about 3 hours he shared his wisdom with the world which is worth million dollars. The excerpts are as follows:

1. Don’t let world events affect your investments

Warren Buffett says even if you realize a big war is about to take place and is unavoidable, still buy stocks. You’re going to invest your money in something over time. One thing you can be sure of is if a war broke, the value of money would go down. … That happens virtually in every war. The last thing anybody should do is hold money during a war; because after the war you might want to own a farm, you might want to own an apartment house, you might want to own securities. By holding you money without investing it somewhere, you are simply declining its growth. During World War II the stock market advanced. The stock market will have its ups and downs as it is, but eventually it is going to advance some time.

2. Don’t get affected when your stocks go down

Warren Buffett only likes to buy stocks for a lot less than he thinks they are really worth, this suggests you can get a bargain or two—although, as always, there is no guarantee. Instead when your stocks go down, buy more. Some day they have to be revived. Precision in stocks is just not possible. Have patience; give some time to your investment. Get associated with your stocks by watching their movement.

3. You don’t have to be an expert

The stock market offers you so many opportunities to invest in thousands and thousands of different businesses. You don’t have to be an authority on every one of them. You don’t need to be an expert on 10 percent of them even. You just have to have some conviction that a given company or a group of companies are likely to make more money 5, 10 or 20 years down the line from now on. Read up, gather information, discuss with your friends, some professional and that is not so difficult to make a decision. Warren Buffett advices to be watchful and use common sense; and if you have no expertise at all, Warren Buffett recommends a low-cost index fund. Keeping costs to a minimum is enormously important in investing. If you’re in effect paying out 1 or 2 percent annually of your portfolio, that’s a big tax that you don’t have to pay.

4. Don’t go for immediate gratification of quick profits  

• Generally speaking, everyone is interested in making a quick profit and there’s no law against making quick profits. But while investing one needs to be wise; invest in stocks of companies which are there to stay, not the ones who are established for cheating investors. Grow with the company you have invested in. Don’t make money by selling the company. … The answer isn’t to sell the company. The answer is to keep running the company well. Take pride in your stocks; see the growth of the companies, therefore, understand its revenue, expenses, growth potential, assets, liabilities, and a host of other information.

5. Bulls markets are fun for little time

Warren Buffett warns against the whimsical and irrational bullish market behavior of stock market. Prices in the bullish face make an investor “behave irrationally as well” he says. He also urges nervous or beginners in investment against going into stocks at a time of extreme exuberance and becoming disillusioned when paper losses occur. A Bull market is when everything in the economy is great, people are finding jobs, gross domestic products (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bullish phase is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations – especially when stocks become overrated. If a person is optimistic and believes that stocks will go up, he or she is called a “bull” and is said to have a “bullish outlook”.

The remedy to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off and elevated. Warren Buffett’s bottom line fundamental advice: “Ignore the gossip, keep your costs minimal, and invest in stocks as you would in a farm.” He also advises investors forming macro opinions or listening to the macro or market predictions of others is a waste of time.

Some of the illustrative investments that fuelled Warren Buffett’s (Berkshire Hathaway) fortune include the kinds of companies that he called ‘inevitables’ they are cash generative brands such as Gillette, Coca Cola and American Express. In the case of American Express, Berkshire first bought its shares in the company in 1964, adding weight to one of the Sage’s famous observations; in his words “our favorite holding period is forever.”