As much as the professional stock traders would like us to think that they are rational analyzers of expected future cash flows and P/E ratios, there is still a great deal of speculation, gambling, and herd behavior in the stock markets. For example, take a look at the activity of Tesla’s stock just since the beginning of the year 2020:
Figure 13.9. Tesla’s Stock Price by Fred Rowland is used under a CC BY-NC 4.0 License. Source: Yahoo Finance data (11/30/2020).
There is no rational reason for the stock to rise almost 250% in 2020. Tesla had been announcing good news about vehicle deliveries, but there was no reason to expect earnings per share to increase 250% anytime in the near future. Tesla stock is clearly in a bubble. Tesla, of course, is just one of many instances of speculation and gambling in the stock market. Bitcoin went from under $1 per coin in December 2016 to almost $20,000 per coin in December 2017, an increase of 2,372%. It then dropped to under $5,000 per coin and now trades around $9,500 per coin.
Qualcomm was a chip maker for smartphones, and its stock jumped from $5 per share to over $90 per share in just the one year (a 2,619% increase) because investors saw it as the only major supplier of chips. When competition entered and the dot.com bust happened, Qualcomm dropped to a price in the mid-teens. Fortunately, it stayed viable and over the next 20 years, the company has grown, and the stock is now approaching $90 again. We are not going to spend a long time on bubbles, so for classic analysis of historical bubbles and busts, read Manias, Panics, and Crashes: A History of Financial Crises, Seventh Edition, by Robert Z. Aliberand Charles P. Kindleberger.