The argument continues to rage about whether the tech sector is in a “bubble.”
The answer is clear:
“Bubbles” are rare, extreme events in which investment activity and valuations temporarily deviate wildly from historical trends — and then crash back down to the trend line in a colossal collapse.
“Booms,” meanwhile, are far more common. They also see ever-increasing investment activity and valuations, and they also end in mean-reversion (“busts.”) But the magnitude of the dime-a-dozen boom-bust cycle is nothing like the peak and valley that you experience in a bubble.
The chart below clearly illustrates this.
It shows private investment in tech startups year-by-year since 1990:
As you can see, there is one clear and glaring anomaly over this 25-year period: The late 1990s. In hindsight, that was clearly a “bubble,” though it actually wasn’t so obvious at the time.
The rest of the period is composed of standard cyclicality — booms and busts. These cycles normally last about 10 years. We’re about 7 years into the latest one. At some point soon (this year, next year, the following year?) we’ll enter the bust.
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