When Does A Bubble Spell Trouble? - By Jason Zweig

The minutes of the latest Federal Reserve policy meeting, released this past week, show that central bankers have been worrying that the financial markets might turn into a bubble — the term for a perilously overvalued situation that can burst without warning or mercy.

Those who want to understand whether markets are in a bubble today should study the first bubble from almost three centuries ago.

The clearest lesson from history: Worries about a bubble matter less than how the investing public reacts to those worries. By that standard, while today’s stock market is no bargain, it doesn’t resemble the classic overhyped and hyperreactive markets that experts generally agree were bubbles, such as 1999-2000, 1929 and 1720.

This takeaway comes from the most visually stunning and, in my opinion, one of the most important investing books of the past year: “The Great Mirror of Folly: Finance, Culture, and the Crash of 1720,” published in November by Yale University Press. The volume commemorates a collection of prints, poems, plays and prospectuses first published in Amsterdam 294 years ago.

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Related book: The Great Mirror of Folly: Finance, Culture, and the Crash of 1720 (Yale Series in Economic and Financial History)