It is extremely difficult, if not impossible, to identify a bubble in real time. But even if you can identify a bubble with certainty, don’t expect the affected stocks to experience a drastic drop in price anytime soon. That’s one of the lessons I take with me when I read a new article Christian Stolborg and Robin Greenwood.
They looked at all boom-bust stocks in the US since 1980. Boom-bust stocks meet the following criteria: (i) they have returned >100% in the last 12 months and the last 6 months, (ii) a positive return in the current month, (iii) a price-to-book ratio or a price-to-sales ratio of more than 5x, and (iv) a decline of at least 50% in the next 24 months.
As you can see in the chart below, there have been quite a few of these boom-bust stocks, not just in 2000 but during the period from 1980 to 2023 covered in the study.
Boom-bust stocks since 1980
Source: Stolborg and Greenwood (2025)
With the benefit of hindsight, we can identify these stocks and know exactly when their stock prices peaked. But when did they crash? Today’s second chart shows that it could take more than a year for even these extreme bubble stocks to experience a significant decline. About 75% of bubble stocks are down 50% within a year of peaking, but 25% of stocks float for more than a year before crashing.
And because boom stocks are defined as returning at least 100% in the six months before they peak, a 50% drop only means that investors have lost six months of gains by then. Often the declines continue from there until most of the gains from the bubble phase are lost again.
Months until boom stocks meet crisis criteria of a 50% decline
Source: Stolborg and Greenwood (2025)
So even if you know you are in a bubble, stock prices can remain near the bubble peak for quite some time. But are people at least talking about the fact that stocks were in a bubble at the time? It turns out no. There are two types of media coverage of boom-bust stocks, as exemplified by Gamestop in 2021 and Yahoo in 1999. Gamestop was immediately identified as a bubble stock, and the media talked a lot about the Gamestop bubble as it unfolded and before the stock crashed. But this is the exception rather than the rule.
According to the study’s authors, most of the media coverage looks much more like Yahoo did in 1999. Media coverage of a possible Yahoo bubble increased about a year before the stock actually hit its all-time high and then collapsed. Once the bubble burst, the share of media articles labeling Yahoo as a bubble stock was about half of what it was in 1997 and 1998. It wasn’t until the crash fully unfolded in 2003 that the media recharacterized Yahoo stock as a bubble stock, because by then it was clear to everyone that the stock had gone through a boom-and-bust cycle.
Gamestop 2021 vs Yahoo 1999
Source: Stolborg and Greenwood (2025)
The lessons I learn from the article are that (i) it is incredibly difficult to identify a bubble in real time, (ii) you cannot trust the media’s or investors’ concerns about a possible bubble as a signal to identify the risk of a crash, (iii) even if you are in a bubble, many stocks can hang near their all-time highs for a long time, giving investors hope and short sellers seemingly endless pain before the stock price collapses.
But just to make sure you don’t blame me for being a booster of AI stocks. Although the media usually overlooks a bubble, they are sometimes noticed in time. Maybe AI stocks will follow the path of Gamestop, maybe they will follow the path of Yahoo. Don’t know. We’ll find out in due time.
There are some other interesting results in the article about what metrics to use to get an indication that a stock is in a bubble, but I’ll leave it up to you to read the article and find out more for yourself.
#people #talk #bubble #crash #anytime