Part 1: Understanding Market Cycles

Every generation of investors has faced the same uneasy question: are we in a bubble?

From railways in the 1800s to dot-coms in the 1990s, and now artificial intelligence and digital assets, history has a way of rhyming. Yet it’s rarely obvious in real time whether markets are truly overextended or simply adapting to a new phase of growth.

At Teaminvest, we see this debate not as a call to panic, but as a moment to think clearly. The question isn’t whether we’re in a bubble — it’s how we behave when the crowd believes we might be.

What defines a bubble?

A bubble occurs when prices detach from fundamental earnings power, when optimism becomes self-reinforcing. The spark is usually genuine innovation or economic progress. The fuel, almost always, is easy money (debt) and abundant liquidity.

When interest rates stay low and capital is cheap, investors push valuations higher, often rationalising that “this time is different.” The cycle typically follows a familiar pattern: early enthusiasm, widespread participation, euphoria, and finally, capitulation.

Yet not all periods of strong price growth are bubbles. Some innovations, like electricity, personal computing, or the internet, did indeed justify dramatic long-term gains, even if early investors overpaid. The challenge for today’s investor is distinguishing between lasting progress and temporary mania.

Lessons from history

The past offers perspective more than prediction. In every major bubble, two ingredients appear repeatedly: technological ignition and financial fuel. The South Sea Bubble was fuelled by speculation around new trade routes. The dot-com boom was built on dreams of the digital age, financed by cheap credit.

When liquidity is plentiful, valuations rise across the board. When it evaporates, even sound businesses can be dragged down temporarily. As one analyst put it, “liquidity is the oxygen of markets.” Its sudden absence — not valuation alone — often triggers collapse.

Importantly, most bubbles don’t end overnight. The 2000–2002 unwind of the internet boom took years, as optimism faded gradually into realism. For patient investors with discipline, those periods also created some of the best buying opportunities of the following decade.

Echoes and evolution

So, what about today? Some see clear signs of an “everything bubble,” where asset prices from equities to real estate have been inflated by years of ultra-loose monetary policy. U.S. money supply expanded dramatically after COVID stimulus programs, and central banks worldwide kept rates near zero for longer than history might have advised.

Technology again sits at the centre of the story. Ten major firms, including the likes of Microsoft (NASDAQ: MSFT) and Nvidia (NASDAQ: NVDA) have accounted for more than half the S&P 500’s rise since 2022. Venture capital has poured billions into AI start-ups, some without a dollar of revenue. Those parallels with the late 1990s are hard to ignore.

Yet the comparison isn’t perfect. Many of today’s leading “tech companies” are immensely profitable, cash-generating businesses, unlike the unproven dot-com hopefuls of 1999. Some of the valuations may be high, but so are their margins and reinvestment capabilities.

This mix of real growth and speculative excess makes the current environment more complex than past booms. As Howard Coleman, Teaminvest’s co-founder, often reminds members: “We will have a crash; I just can’t tell you when, and I can’t tell you how deep.” The lesson is humility: markets can stay irrational longer than we expect, and rational longer than we fear.

Does it actually matter?

Whether or not the broader market is in a bubble matters less to long-term investors than how their individual companies are valued and financed. If you own businesses with durable earnings, low debt, and pricing power, short-term market swings should not threaten your compounding journey.

Bubbles tend to punish speculation, not discipline. When the crowd buys because “everyone else is making money,” rational investors quietly review balance sheets, revisit assumptions, and assess margins of safety.

As we often say at Teaminvest, successful investing is not about prediction. 

It’s about process. 

The temptation to time markets or chase hot trends is strong, but those are the very emotions that can destroy long-term wealth.

Preparing, not predicting

Today’s environment presents a dual reality. Valuations in parts of the market look stretched, yet liquidity remains accessible and earnings in key sectors have been robust. Interest rates have eased recently, but government debt levels are at records. Both optimism and caution have their place.

Rather than asking “are we in a bubble?”, Teaminvest members focus on questions with actionable answers:

• Are the businesses I own fundamentally sound?
  
• Can they withstand a drop in market sentiment?
  
• Do the earnings support the current share price?
  

The goal is not to guess when the music will stop, but to ensure you’re not overleveraged or dancing too close to the edge when it does.

Looking ahead

If there’s one certainty, it’s that markets will continue to oscillate between greed and fear. Bubbles inflate, deflate, and are replaced by new ones. The disciplined investor endures each cycle by focusing on what doesn’t change—strong businesses, sensible valuations, and patience.

In Part 2, we’ll explore how Teaminvest members apply this thinking in practice: reviewing companies, managing risk, and maintaining composure whether a bubble pops, deflates slowly, or keeps rising a little longer.