August 3rd, 2009
11:21 AM GMT
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HONG KONG, China - On our recent trip to Shanghai, my crew and I visited People's Square, a park in the heart of the Chinese city where children play in a fountain, fly kites, and blow soap bubbles.
These may not be the only bubbles forming in China.
According to many investment analysts, the nation's stock markets and real estate sector are headed into bubble territory. And investment bubbles, they say, can lead to significant losses if those bubbles burst. Just look at the U.S. housing collapse and the current financial crisis. Read more on growing anxiety in China
So how do you avoid an asset bubble? First, you need to learn how to spot one.
1) All bubbles start with a good story: Manias over dot.com companies, U.S. homes, even tulip bulbs all began the same way. People get overly excited about the prospects of an investment and bid up its value – even if the fundamentals lag.
2) Money, money: Money is available. Borrowing is made easy.
3) Herd mentality: Everyone and his third cousin are talking up that particular investment. Independent economist Andy Xie suggested taking a survey of the people around you. "When you hear that 90-percent of those people are in, you want to get out."
4) Denial: Jerry Lou of Morgan Stanley says if "you keep telling yourself that the story is so good, the growth is so robust, it's rock solid," it is time for a reality check.
Lou says hedge funds might want to keep playing the bubble before the crash, but warns average investors to be disciplined. Xie believes if you are in a bubble, it's best to get out, preferably early. "Don't try to make the last dollar," he cautions, "it's really dangerous." Watch how IPOs in China are making a comeback
It’s much safer to blow bubbles in the park.
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