Excessive speculation has repeatedly led to the downfall of investors and markets. As Warren Buffett explains, it often begins with early investors identifying a genuine, overlooked opportunity. However, as word spreads, the investment loses its connection to fundamentals and turns into pure speculation—inevitably leading to a crash.
At the 2006 Berkshire Hathaway Annual Meeting, Buffett summed it up succinctly: “What the wise man does in the beginning, the fool does in the end.” He pointed out that asset classes initially driven by strong fundamentals eventually attract speculative interest, which can spiral out of control. A classic example is the infamous tulip mania in Holland in the 17th century, where the initial value of tulips was rational but soon became wildly inflated due to speculative frenzy.
This cycle repeats throughout history: early investors profit based on fundamentals, but as greed and envy take hold, speculation dominates, and the bubble bursts. The lesson? Investors must remain cautious and avoid being swept up in speculative manias detached from intrinsic value.
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© 2025 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.