HOW TO PROFIT FROM THE NEXT INVESTING BUBBLE


By RUSSELL PEARLMAN, ANNA PRIOR and ELIZABETH O'BRIEN

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Richard Ross is resisting the urge to say it, so we'll say it for him. He told you so.
Ross works at the brokerage firm Auerbach Grayson as a "global technical strategist" -- Wall Street jargon for someone who looks at trading patterns and tells clients which investments are good (or bad) bets. With assets of all kinds having soared of late, everything seemed a little pricey to Ross. But one investment in particular caught his eye: silver. Fueled by inflation fears, the metal's price had shot up 170 percent in less than a year; it was rapidly approaching $50 per troy ounce, a price not seen since right before Ronald Reagan's first term. "It's a classic bubble," Ross thought. So late last spring Ross released a research report titled "Silver: Taking Our Chips off the Table."

400 Years of Bubbles

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Two memorable things happened after Ross issued his report. First, he got an e-mail the next day from a reader, with the subject heading "Richard Ross the Dumb---!" Second: Over a two-week stretch starting just after his report came out, the price of silver plummeted almost 30 percent.
You'd think all investors over the age of 25 would, by now, have had the concept of bubbles seared into their brains. Those who didn't get zapped in the tech-stock meltdown almost certainly lost a few layers of skin in the U.S. real estate bubble and the crisis that followed. But it turns out, even painful crashes haven't stopped buyers from driving other assets into bubble land -- at least if you use bubble to describe investments whose prices are higher than fundamentals like supply and demand dictate they should be. And startlingly, some observers say bubbles are forming with more frequency than ever. The $108 billion investment-management firm GMO says an asset reaches bubble territory only when its price far exceeds the historical average. This happens to a typical asset once every 30 years, but the past decade or so has been unusually bubble-rich, with a new one appearing every three or four years. "They occur in bunches, and recently there have been more," says Jeremy Grantham, GMO's chief investment strategist.

Inside the September Issue

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Today there are plenty of suspects for a bubblephobe to be wary of -- whether it's the stock market (still up more than 75 percent since its 2009 low), bonds (more expensive than they've ever been by some measures) or gold (worth more than six times as much as in 2000). Experts have various theories on why price run-ups are proliferating. Exchange-traded funds -- groups of assets bundled to trade like a single stock -- have made it easier for performance chasers to buy the hot investment du jour (drawing newbies into silver and gold, for example). Improved technology lets investors move in and out of assets faster, creating bigger price swings. And the financial crisis, itself the spawn of a bubble in housing, has had unanticipated side effects: Investors looking for safe assets flooded into bonds, for instance, driving bond prices into potentially dangerous territory and leaving the investors vulnerable to the potential effects of a downgrade in the federal government's credit rating.
See a bubble, walk the other way -- what's so complicated about that? Plenty, it turns out. It's all but impossible to spot a bubble before it collapses, and experts seldom agree about whether a given investment fits the bill; one analyst's catastrophe-in-the-making is another's new normal. Recently, corporate profits have soared and demand for commodities has rebounded -- both sound reasons why stock and commodity prices should be higher. Plus, values of all kinds of assets tend to move in cycles, so even a sharp slump could be completely ordinary, says Kevin Mahn, chief investment officer of Hennion & Walsh, which manages $2 billion. There's also the risk of fleeing an investment too soon, since bubbles can be profitable on the way up. Legendary speculator George Soros said at the beginning of 2010 that he believed gold was in a bubble, but he waited more than a year before selling off his own big stake.
Of course, whether an asset is officially in a bubble is irrelevant. Selling an overvalued investment before it falls is always a good move -- and so is figuring out which other industries can benefit when a bubble bursts. Here, a look at five assets whose recent price trends have led people to use the B word.
Illustrations by Ryan Etter for SmartMoney. 
Graphics by Emily Cooper for SmartMoney.