What is a ‘Market Bubble’?

As a regular reader of Dalal Street magazine, I appreciate your stock recommendations. However, my portfolio recently suffered due to a sharp decline in Small-Cap stocks. I often hear about ‘bubbles’ but would like a brief explanation and advice on what steps to take. - Shyamolie K.

Editor Responds: We appreciate your kind words of encouragement. A ‘market bubble’ occurs when asset prices greatly inflate and surge far beyond their intrinsic value, influenced by factors such as speculative trading, excessive optimism, relaxed credit conditions, and a herd mentality among investors. Market bubbles are inherently unstable and can lead to significant financial losses when they inevitably burst.

Investors can safeguard against market bubbles by diversifying portfolios across asset classes, managing risks according to predefined goals and tolerances, and staying informed about market fundamentals to avoid speculative impulses. Resisting herd mentality and regularly reassessing investments help adjust to market changes, while prudent use of leverage and clear exit strategies minimize losses during downturns. Check out our Tiny Treasure services that offer researched small-cap stocks with inherent growth potential.