Investment Bubbles, Manias, and Panics. Remain Patient and Rational when Investing. Tulip Mania, The South Sea Company, the Great Crash.

According to most, an investment bubble could be described as a period of high trading volumes at prices that are at odds or at a high variance above common measures of intrinsic value. For housing, the intrinsic value of the property might be a multiple of its net rental income, for a common stock, a multiple of its book value, earnings, or dividend payments.

During the "dot-com" or technology bubble stock prices for most technology and telecommunication companies were trading well above any reasonable measure of current earnings or dividends. To be sure, a vast number of the companies involved in the tech bubble had little to no earnings at all. Former Federal Reserve Chairman Alan Greenspan coined the phrase "irrational exuberance" to describe the psychology of investors and markets during this time. Many people believed that prices would go up forever because modern technology would transform business and enable them to achieve future earnings that seemed unfathomable only a decade before. So goes the usual mantra at least. More sensible minds, however, would conclude that vast amounts of people, acting of their own volition, chose to casually disregard all semblance of reason with regards to corporate fundamentals and instead act on faith... a faith that other people would be dumb enough to keep buying securities of dubious intrinsic or real value and thus provide someone to whom they could sell their shares at a higher price in the future.

Acts of faith, however, are better left to theological or religious spheres than investment ones. Crowds are prone to turn and panic with little warning and little chance for the average investor to escape. When an investment bubble bursts, unless you got in near the point of its initial ascent, you will most likely be waiting years to recover your losses and return to break-even. And in other instances, your break even point may be unattainable as your investment dropped to zero.... a 1,000,000 % gain on zero is still zero.

There have been numerous investment bubbles and manias over the centuries. Tulip Mania first hit Holland and then began to burst circa 1637. During this time, a single tulip bulb could fetch the price of a home or 10x the annual earnings of a skilled craftsman. Rational? Of course not, but investors were hoping that another sucker would come along and buy their tulip bulbs for a little higher in a week, month, or year down the road. They wanted to ride the upsurge in tulip bulb prices and make it rich quick.

There was also the South Sea Company and Mississippi Company Bubbles of the 1720s, the Railway Manias of the 1840s, the Great Crash of 1929, and countless others on markets all around the world. What propels bubbles? Behavioural psychologists could undoubtedly write books on people's particular motivations, but stupidity and greed mark the top of my list. If something does not make money, don't buy it. If it would take over 25 years to make your money back given present earnings levels, move on to another investment. There is no need to succumb to get rich quick schemes when honest rational investments are in plentiful supply. Rationality and patience will always win the day in the investment business, it just might take some time, and a fair amount of resistance to greed.

Some U.S. Stocks to Watch. IBM, BAC, TOL, JPM. American Dollar Hits New Lows.

IBM (NYSE:IBM) recently announced that it expects to earn $20 per share by 2015. Of course, any prediction that is so many years down the road has many inherent assumptions, and thus is almost certain to be wide of the mark. IBM, however, has been on a tear recently and business is booming. Currently trading at $183 per share, and up over 40% on the year, many investors have missed the party... but buying a well-run business at a reasonable price is a lot better than buying a poorly-run business at a discount.

Bank of America (NYSE: BAC) has recently fallen below $10 per share. This price is a 25 % discount to the company's tangible book value, which will surely be a buying signal for many value investors. Bank of America is highly levered to a recovery in the U.S. economy, so if the American economy does well, look for Bank of America to experience some serious up-side in price.

JP Morgan & Company (NYSE: JPM) - Best in class U.S. bank. Recently J.P. Morgan announced a solid quarter with increased revenue, lower credit losses, and rising income.

Toll Brothers Housing (NYSE: TOL) - For anyone wishing to invest in U.S. Real Estate, Toll Brothers Housing is up 25% for the year and is really showing signs of gaining momentum. The stock is finally getting some positive traction amongst investors and it is beginning to stop the bleeding as it posts lower losses in recent quarters. Keep in mind, however, that this company is still dicey, as its bonds were placed in junk status.

Happy Investing : )

Queen's University Develops PaperPhone, a new Paper-Thin Computer / SmartPhone / E-Reader!

Queen's University in Kingston has announced the development of a new paper-thin and bendable computer/smartphone/e-reader. The school's Human Media Lab has named it the "PaperPhone" and it measures 9.5 centimetres diagonally. Interestingly, it can even be rolled up and stored like a regular piece of paper. 

Queen's has stated that the device is probably about five years away from being available to the mass market, but this is surely a game-changing technology that many companies will love to get a hold of. RIM, Apple, Microsoft, and others will undoubtedly be paying close attention to how this develops.

The prototype cost $7,000 for Queen's to make, but within a few years the school should have that number way down. The key to the future prosperity of this invention is that the price needs to come down low enough so that consumers and businesses will conceivably own multiple e-paper sheets of many sizes. They could utilize them to cover desks, office walls, and board room tables. To be sure, the possibilities in the institutional and corporate environments for this type of technology are immense.

Eventually, the devices will even be able to be folded into your pocket so that you can carry around a huge screen for presentations etc.

For more information, check out the link from Queen's University below:

http://www.queensu.ca/news/articles/revolutionary-new-paper-computer-shows-flexible-future-smartphones-and-tablets

Investors Should Buy What They Know and Steer Clear of What They do not Understand.

It is important for the intelligent investor to "buy what they know." Or only stick to owning businesses for which they would be able to notice opportunities, changes, or threats in their respective sectors. When competing with millions of other people around the world for the buying and selling of stocks, one must possess a reasonable expectation of spotting competitive, strategic, or systemic threats to the businesses that they own. It is, therefore, important to diversify, but only within reason.

For instance, many investors have an appetite and desire to own technology and renewable energy stocks. On the whole, the rapid and inherent nature of change in the technology sector makes threats and difficulties very difficult to notice with regards to many technology stocks on the market today. Many great technology names have come and gone over the years, and few have managed to withstand the constant pressure to innovate and re-invest themselves.

IBM (NYSE: IBM) has done so for decades, and continues to do so with much success, but many others are in constant fear of being overtaken by the next great technological fad or change. Even the great Microsoft (Nasdaq: MSFT) is beginning to come under siege by Google (NYSE: Goog), Apple (Nasdaq: AAPL) and others... especially in the cloud computing arena, which might be the next great shift in the technology space.

Other individuals might be very astute at spotting key developments in the fashion or retail space. Personally, many clothing stocks such as Aeropostale (NYSE: ARO), American Eagle (NYSE: AEO), Gap (NYSE: GPS) etc. carry a lot of uncertainty as I may be unaware of important trends taking place in the fashion space. On the other hand, trends in the energy, banking, or consumer staples arena are much easier for me to wrap my head around. A knowledge of current oil inventories and reserves for Suncor (TSE: SU), in combination with a prediction of energy prices over the next year, could give me a reasonable valuation for the company, but a variety of key factors concerning current clothing trends would leave me at a disadvantage compared to other investors in this sector of the economy. In the Art of War, Sun Tsu said to evade your enemy if unequally matched. In investing, the same is true.

Warren Buffet, the Oracle of Omaha and guru for many value investors, always said to steer clear of something that you do not understand. It is nearly impossible to tell if a company has a "durable competitive advantage," or good defence against competition, if you do not understand how its business operates, who its primary competitors are, and what threats or changes are on the horizon. Without this knowledge, the intelligent investor is exposing themselves to far too much risk. Investing should never be a guessing game, but a calculated and well played match between you and other investors to acquire businesses for a reasonable and well rationalized price.

If you cannot assign a true dollar value to the company, independent of the current stock price, than you should not own it. You would not buy a rental property without first understanding the neighbourhood it is in and how much rent it generates, so do not buy a stock without first knowing how it actually makes its money, who its customers are, and what the competition is like.

If most industries are unfamiliar to you, a quality, low-fee mutual fund or exchange traded fund are probably best.

Happy Investing : )