Excessive speculation, it’s the downfall of investors and markets time and time again, but as Warren Buffett notes, it often begins benignly when early investors see a previously unrecognized opportunity. However, as word of the opportunity starts to spread, it soon loses all relationship to underlying fundamentals and becomes nothing but sheer speculation and is doomed to end badly.
“But, you know, it’s that old story of what the wise man does in the beginning, the fool does in the end,” Warren Buffett noted at the 2006 Berkshire Hathaway Annual Meeting. “And with any asset class that has a big move, that’s based initially on fundamentals, is going to attract speculative participation at some point, and that speculative participation can become dominant as time goes by. And, you know, famous case always being tulip bulbs, I mean, tulips may have been more attractive than dandelions or something, so people paid a little more money for them. But once a price history develops that causes people to start looking at an asset that they never looked at before and to get envious of the fact that their neighbor made a lot of money without any apparent effort because he saw this early and so on, that takes over.”
Hear Buffett’s full explanation
© 2021 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.