Stocktake: Bubble trouble for informed investors

Many young and inexperienced investors have piled into meme stocks and bubbly sectors of the market this year. However, a new working paper from Queens University researchers suggests newbies don't drive market bubbles; rather, many experienced investors ride bubbles only to be left with painful losses.

Prof John Turner and Dr William Quinn’s paper, Riding the Bubble or Taken for a Ride?, examines the 1895-1900 British bicycle mania when investors went crazy for cycle companies. More than 600 new cycle companies were established over an 18-month period. Cycle stocks almost trebled in value in early 1896 only to become “almost worthless” after 1897.

The interesting part is that “informed” investors reduced their holdings “substantially” during the crash, suggesting they were riding the bubble. Cycle shares attracted manufacturers, financiers, institutional investors and middle-class professionals, whereas inexperienced investors such as women and clergy steered clear.

“Those who performed worst were not typically the least informed groups,” the study finds, “but gentlemen living near a stock exchange, who had the most time, money and opportunity to engage in speculation.”

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Informed investors often think they know better or that they can get out before the bubble bursts. The Queen’s study suggests they should think again.