Market mania.

• Author: Green, Robert
• Position: Stock market - Column

Every few years, Wall Street seems compelled to repeat history by going through a period of manic, irrational activity. We seem to be entering another phase of Market Mania.

These outbursts are nothing new. One of the best descriptions of this phenomena was published in 1841, with Charles Mackay's "Extraordinary Popular Delusions and the Madness of Crowds." Mackay chronicled such infamous manias as the tulip bulb obsession of the mid-1600s and the South Sea Real Estate "Bubble" of the early 18th century, when thousands of otherwise sane investors ruined themselves financially.

Since then, there have been hundreds of financial manias, appearing with depressing regularity. Each time, the particular type of investment changes, but the script remains the same. It goes something like this:

Phase One: In the beginning, there is normally a rational basis for people's interest in the investment. Usually the investment is something entirely new, with no history to guide investors. Usually, the investment offers obvious potential to unsophisticated investors. The potential profit is easy to see, the potential pitfalls are not.

An example of this kind of investment was the biotechnology mania of a decade ago. This was a new industry, just born of high technology. It was easy to see the potential wonder drugs that would flow from these new labs. Cures for cancer, AIDS and multiple sclerosis were obviously just around the corner. And in fact, a few new wonder drugs did find their way to market, producing tremendous profits. What was not obvious was how long it would take most researchers to develop feasible drugs, how incredibly expensive the process would be, how stringent the regulators would become, how funds for research would dry up, and how many research labs would crowd into the market.

Phase Two: A few bona fide fortunes are made. It's almost always necessary for at least a few people to make some real money to give the coming mania some credibility. Like the gold rushes of the 19th century, there were a few early fortunes that fueled the desires of all those who would follow.

Phase Three: The desirability of the investment becomes common knowledge, usually through the news media, but sometimes by word-of-mouth. The result is the same. You can always recognize a financial mania when you hear talk of big money being made in places where such conversation is unusual. (I couldn't help overhearing an excited and detailed discussion of the merits of...