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TIP547: The Truth About Stock Market Forecasts
We Study Billionaires - The Investor’s Podcast Network
Understand the Cycles: History Repeats in Bubbles and Busts
Human nature remains unchanged, leading to recurring economic booms and busts that are essential to study. Historical instances of market bubbles, such as the Dutch tulip mania and the tech bubble, illustrate this cycle. Despite awareness of past bubbles, many investors believe their current situation is an exception, fearing they will miss opportunities as friends profit. Bubbles arise from narratives surrounding technological revolutions, fueled by cheap liquidity and high leverage, which often veils the instability in traditional security valuation methods. The escalation of a bubble is propelled by margin purchases, while the inevitable correction reveals the over-leverage through margin calls. Notoriously, the phrase 'this time is different' serves as a caution against complacency, reminding investors of the importance of valuation and the principle of buying with a margin of safety as emphasized by financial sages like Benjamin Graham and Warren Buffett.
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