If you're feeling FOMO, envy and greed about record stock prices, you're not alone. That's how market bubbles form.

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15 hours ago

Some stock-market contrarians reassuringly say that investors' current concern that the S&P 500 SPX, the Dow Jones Industrial Average DJIA and the Nasdaq COMP are all forming a frothy U.S. market bubble is exactly why the market isn't in one.
But a market bubble can materialize even when most investors are worried about one. Like now. A recent Bank of America fund-manager survey found that a record 91% of survey participants believe the stock market is overvalued, and Google Trends shows a sizable increase in recent weeks in the number of finance-related searches focusing on bubbles, as you can see from the chart below.
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When it comes to bubbles, contrarian analysis typically gets it wrong. An analysis of past bubbles suggests not only that widespread concern about bubbles is consistent with one forming — such worry actually plays a central role in a bubble's latter stages. Consider the definition of bubbles from Robert Shiller, the Yale University finance professor who won a Nobel prize in large part because of his research into stock-market bubbles.
In his 2000 book 'Irrational Exuberance,' Shiller wrote that a bubble is self-perpetuating: 'News of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors.'
Shiller added that these newcomers, 'despite doubts about the real value of an investment, are drawn to it partly through envy of others' successes and partly through a gambler's excitement.'
Notice from Shiller's description that bubbles involve a high degree of cognitive dissonance: Despite concern about stocks' overvaluation, investors bet heavily on equities. This dissonance is readily apparent in the Bank of America survey, for example: Even though 91% of survey respondents say that stocks are overvalued, they on balance are more bullish than they've been in months.
Investors resolve the dissonance by telling themselves they will know when the bubble is about to burst and get out in time. But the history of bubbles teaches us that this belief represents a triumph of hope over experience. It's simply the greater-fool theory in disguise.
C3.ai AI illustrates how quickly a bubble can burst. Earlier this week the company reported preliminary results for its July quarter that fell far short of analyst expectations, and its stock plunged almost 26% in a single session.
It's true that significant differences exist between the current market and the top of the internet bubble, as Daniel Newman, CEO of the Futurum Group, recently argued in a MarketWatch column. But no two bubbles are alike, and the existence of differences between today and early 2000 doesn't mean we're not in a bubble. As I recently pointed out, 10 time-tested valuation indicators show today's stock market to be more overvalued than those at any other time in U.S. history.
Benjamin Graham, the father of fundamental analysis and author of the investing classic 'The Intelligent Investor,' made fun of the greater-fool theory by telling a joke, which Warren Buffett of Berkshire Hathaway retold in his 1985 shareholder letter:
'An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. 'You're qualified for residence,' said St. Peter, 'but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in.' After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, 'Oil discovered in hell.' Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. 'No,' he said, 'I think I'll go along with the rest of the boys. There might be some truth to that rumor after all.' '
The bottom line? Contrarians are wrong in thinking a bubble can't be forming just because there is widespread current concern about stock-market overvaluation.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at
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