Price Bubbles Always Burst: Downsides Are Rapid and Unrelenting

The upside of a price bubble usually takes many months to years to develop, but once the bubble is punctured, the price downside can occur in an instant; that is why the downside can be so devastating to unsuspecting investors. When panic sets in, investors can't sell fast enough, so prices can plunge in just a few days.

Crocs (CROX), the maker of Crocs™ brand of colorful resin clogs, could do no wrong as it rose from $22 on January 2, 2007 to peak at $74.75 on October 31, 2007, a 239.77 percent gain. Then, on November 1, the stock collapsed 36.1 percent after it lowered earnings guidance.

As of its April 11, 2008 close of $17.95, CROX is down 76 percent from its all-time closing high.

When a price bubble bursts, prudent investors know to avoid the stock. There may be downside bounces, during which traders can make money and short sellers buy back their shares, but profits are mostly slim as prices trend lower.

In most instances, when prices head down, the excitement and hype for the stock are gone as investors and traders move on to the next momentum play. Fading stocks may seem like bargains, but most of them are not.

Related Articles:

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Crocs Is On an Unsustainable Ride
Crocs Will Eventually Head to the Downside - But When?
Price Bubbles Always Burst: Downside Losses Cancel Upside Gains
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Posted April 17, 2008.