economics | June 13, 2011

Justin Fox: Cleaning Up the Three Types of Financial Bubbles

Fleet footed finance journalist Justin Fox knows whatever bubbles up, must come tumbling down. Writing in the Harvard Business Review this week, where he serves as editorial director, Fox floats some solid ideas on identifying and addressing financial bubbles. He notes that a statistical technique has been created by a trio of academics can be applied to a given company's trading information and, if the data lines up with that of the dark dot-com days, you have a bubble. LinkedIn, based on its first day of trading, was in a bubble, writes Fox.

Fox lists his three types of bubbles: Ponzi, speculative, and the classic that LinkedIn falls into. Fox's advice for the Ponzi is simple: If you knew it was happening, “turn yourself in”. For speculative bubbles—the kind that sunk 1990s dot-commers when share prices bottomed out, he suggests having cash flow when investor funds dry up, and creating a plan for ratcheting down business following the pop. The final bubble involves switching from “expectation market” to “real market”—terms borrowed from Roger Martin—and focusing on a company's actual performance, not on stock price. Fox’s piece flows with the ease and common sense he brings to his keynotes. It’s another must-read from one of America's most trusted business journalists.

Read more about finance journalist, Justin Fox

Up Next

foreign policy | June 12, 2011