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How to Learn From Burst Bubbles


Don't let another one pop in your face.


The chorus of "I'm Forever Blowing Bubbles", music by John Kellette, and lyrics by James Kendis, James Brockman, and Nat Vincent, first performed on Broadway in 1918 (That's right, 1918):

I'm forever blowing bubbles,
Pretty bubbles in the air
They fly so high,
Nearly reach the sky,
Then like my dreams, they fade and die.
Fortune's always hiding, I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.

If written today, the song might better be called "The Investor's Lament". We're much too familiar with the dot-com bubble, the housing bubble, and the credit bubble, each of which, either in turn or in tandem, recently brought the economy to its knees and decimated the fortunes of those seeking the holy grail of ever higher returns -- but who either got on the bus shortly before it went over the cliff or got on early and thought the ride would last forever.

Bubbles aren't a recent phenomenon. In the not too distant past we had, believe it or not, the "Salad Oil Bubble", a matter I'm familiar with because it resulted in the first case I worked on as a young attorney at Cahill Gordon & Reindel, a "Wall Street" law firm I was privileged to practice at for 40 years.

In 1962, Tino De Angelis formed the Allied Crude Vegetable Oil Refining Corporation, with which he attempt to corner the market in soy bean oil. He also bought, at a low price, futures in soy bean oil on which he realized substantial profits as the market price for soy bean oil quickly rose.

With great rapidity, soy bean oil became a hot commodity to invest in. It was a curious occurrence because there was no commensurate bubble in lettuce or arugula (radicchio hadn't been invented yet), and there was no shortage of soy bean oil before its price started to take off.

A large auditing firm was engaged by the warehouse company leasing the tanks to make sure the tanks actually contained salad oil. After all, everyone knows that oil floats on water, so if one didn't look deeper than the tops of the tanks, the only thing to see would be salad oil -- even if the layer was only several inches thick.

Accordingly, the auditors lowered a device into the tanks that took samples at various levels and confirmed the tanks contained salad oil all the way to the bottom.

One day, a rumor leaked out (pun intended) that there was little but water in the tanks. After asserting that the rumor was unfounded, the warehouse company and attending auditors opened the spigot on the largest of the tanks. Sea water poured out for three days.

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No positions in stocks mentioned.

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