EDIT: thanks for all these brilliant responses. Hits great to get the various perspectives. Upvotes are on me!
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So, Wall Street Investors aren’t like, mathematicians. They do produce some documentation on what businesses currently make, and their performance in the past, but a lot of it is gut instincts and what insiders call ‘animal spirits’, which refers to the general mood of the Wall Street subculture. Basically, the moods of the wealthy and what’s trending in their community have a much greater impact on stock prices than the actual performance of the companies that people are invested in. If they think the price of a stock will go up, they’ll buy it, and that *causes* the price to go up. When they think it’s going to go down, they sell it, and that *causes* it to go down.
One of the ways this manifests is what they call ‘speculative bubbles’. Essentially, investors get an idea in their head, like how half the internet was super into hyperloops for a while. The *idea* that something will be really profitable spreads, and *everyone* invests into it. A company that really only needed like $20m to really set up their business model and saturate the market gets $500m in investment, driving the stock price up and up.
Now, the smart people on Wall Street know when something is a bubble. But, like a ponzi scheme, they know that the price will keep going up until the day it crashes. So, they keep buying, planning to sell later – exactly like Bitcoin trading blew up in everyone’s faces. Once the crash starts, the insiders are the first to hear about it, and sell before the price has totally bottomed out.
Back in the 90s, people were starting to get the idea how big the internet was, but at that time there was a few good investments and a lot of bad ones. One of these bubbles formed – people massively overinvested in tech stocks, and because of that overinvestment, the price kept going up.
Once the momentum stalled, the insiders all figured the price had hit its peak and sold, precipitating a price drop. They made a fortune, and then for everyone else, *how much* they lost was a question of how quickly they could get a sell order in.
These types of speculative bubbles are part of the boom and bust cycle of investor economies. It’s intrinsic to how the stock market operates. It happens with just about every new technology and social development. Others in the thread will probably point to specific dumb tech company investments, just like while real estate was trending in 08 people could point to specific dumb mortgages. But those companies get investments because of the way that ideas spread, and how trendy investments see little scrutiny.
So, Wall Street Investors aren’t like, mathematicians. They do produce some documentation on what businesses currently make, and their performance in the past, but a lot of it is gut instincts and what insiders call ‘animal spirits’, which refers to the general mood of the Wall Street subculture. Basically, the moods of the wealthy and what’s trending in their community have a much greater impact on stock prices than the actual performance of the companies that people are invested in. If they think the price of a stock will go up, they’ll buy it, and that *causes* the price to go up. When they think it’s going to go down, they sell it, and that *causes* it to go down.
One of the ways this manifests is what they call ‘speculative bubbles’. Essentially, investors get an idea in their head, like how half the internet was super into hyperloops for a while. The *idea* that something will be really profitable spreads, and *everyone* invests into it. A company that really only needed like $20m to really set up their business model and saturate the market gets $500m in investment, driving the stock price up and up.
Now, the smart people on Wall Street know when something is a bubble. But, like a ponzi scheme, they know that the price will keep going up until the day it crashes. So, they keep buying, planning to sell later – exactly like Bitcoin trading blew up in everyone’s faces. Once the crash starts, the insiders are the first to hear about it, and sell before the price has totally bottomed out.
Back in the 90s, people were starting to get the idea how big the internet was, but at that time there was a few good investments and a lot of bad ones. One of these bubbles formed – people massively overinvested in tech stocks, and because of that overinvestment, the price kept going up.
Once the momentum stalled, the insiders all figured the price had hit its peak and sold, precipitating a price drop. They made a fortune, and then for everyone else, *how much* they lost was a question of how quickly they could get a sell order in.
These types of speculative bubbles are part of the boom and bust cycle of investor economies. It’s intrinsic to how the stock market operates. It happens with just about every new technology and social development. Others in the thread will probably point to specific dumb tech company investments, just like while real estate was trending in 08 people could point to specific dumb mortgages. But those companies get investments because of the way that ideas spread, and how trendy investments see little scrutiny.
It was mostly “fad investing”. Computers were the “in thing” and people were investing heavily in companies involved in tech.
Supply and demand tells us that when you have more buyers than sellers prices go up. People seemed to think prices would keep going up, kept investing and the companies became significantly overvalued as a result.
There was always going to be a correction but when the events of 11th September 2001 occurred, markets across the world collapsed and these overpriced shares dropped rapidly; ultimately the companies that survived found themselves with more realistic share prices.
It was mostly “fad investing”. Computers were the “in thing” and people were investing heavily in companies involved in tech.
Supply and demand tells us that when you have more buyers than sellers prices go up. People seemed to think prices would keep going up, kept investing and the companies became significantly overvalued as a result.
There was always going to be a correction but when the events of 11th September 2001 occurred, markets across the world collapsed and these overpriced shares dropped rapidly; ultimately the companies that survived found themselves with more realistic share prices.
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