After all, isn’t pretty much everything just worth whatever people are willing to pay for it?
In: Economics
There are typical ways items are valued, say by determining actual utility, income generation, cost of creation, cost of comparable items/investments.
typically a bubble is when the prices paid are a result of people thinking they can sell for more tomorrow, than based on more fundamental financial analysis.
For example, investment real estate may be looked at based on the cap rate, which is rent return based on cost of property. If historic cap rates are 10% and they fall to 2%, that’s an indicator that prices are too high relative to the income made. If mature stocks typically trade with a P/E ratio of 15 and a stock is trading with a P/E of 150 and it isn’t a high growth start-up, that could be a bubble.
A good recent example is GameStop stock… the company is likely trending downward longterm because malls are fading, retail in general is fading, physical game media is fading. They’d have to make some pretty fundamental changes to remain relevent and profitable. Maybe there is some hope to improve from where the company is now… but it was a $4 stock not that long ago. Can they double their business and grow to an $8 stock? Even that seems like a long shot! So why did it jump to $20, and $40 and even over $300? Sure there were the shorts covering and all, but lots of people jumped in to buy GME because they thought it could keep skyrocketing. They didn’t care that fundamentals suggested it was a $4 stock if they thought they could buy at $40 and sell for $200.
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