Bubbles are not the enemy

In markets, few expressions generate as much unease as the word "bubble”. When an asset rises rapidly, when a sector attracts excessive enthusiasm, or when multiples seem difficult to reconcile with historical standards, the question immediately arises: are we facing an unsustainable excess? For many investors, this possibility alone is enough to justify a defensive stance: reducing risk, locking in gains, and postponing further investment until there is "greater clarity”. At first glance, this seems sensible. However, over time, this reaction can be less prudent than it appears. Often, the real cost lies not in navigating a bubble, but in staying on the sidelines of value-creation cycles out of fear of excess.

It is important to start by clarifying concepts. An expensive market is not, by definition, a bubble. There are companies, sectors and structural themes that can trade at high valuations for long periods because the market recognises their exceptional growth potential, high margins, robust competitive advantages or strong reinvestment capacity. But when we talk about a bubble, this is a more specific phenomenon that arises when a narrative leads investors to project too quickly a future that is too distant, attracting growing capital flows, often with leverage, concentration and complacency. And it is in these cases that the price stops being based solely on fundamentals and also starts depending on the continuation of enthusiasm. When this happens, the room for disappointment becomes reduced and can trigger disproportionate corrections.

For an experienced investor with a wealth management perspective, this distinction is essential. It is not enough to look at valuations; one must understand how concentrated the positioning is, how much leverage exists in the system, where liquidity stands and whether the rise in prices depends on continuous inflows to be sustained. Simply put, the real risk is not in optimism itself, but in how easily that optimism can turn into a forced selling movement.

In this context, it is also important to recognise something that is not very intuitive: bubbles are not a rare anomaly, but a recurring feature of markets, especially in periods of economic, technological or financial transformation. Whenever a new reality emerges, investors try to anticipate its impact before stable metrics exist to measure it. First comes the narrative, then capital flows in, and only later does it become clear who the long-term winners are and where there was excessive speculation. This has been the case with railways, electricity, the internet and several more recent waves of innovation.

This means that, although bubbles can generate capital misallocation and violent corrections in the short term, they also fulfil an economic function: they finance infrastructure, attract talent, accelerate adoption and build capacity before demand is fully visible. The technology bubble of the late 1990s is a classic case, where many companies disappeared, but investment in fibre, data centres, software and networks created the foundation for today’s digital economy. In several phases of history, the market exaggerated in price, but it did not err in direction.

It is precisely for this reason that automatically rejecting everything that seems "too hot” can be expensive. In almost all major structural trends, there have been companies that fell by the wayside and others that became dominant platforms, generating extraordinary returns. The investor who completely avoids a theme because he considers it excessively popular runs the risk of giving up not only the speculative component, but also participation in the great waves of value creation. In wealth management, this opportunity cost should not be underestimated.

In this regard, there is also an important behavioural trap: the fear of bubbles often induces overly tactical management. The investor reduces exposure because the market has valued too much, in anticipation of a correction. However, when that correction occurs, the context remains uncomfortable and the decision to re-enter is successively postponed. The result is well known: selling too early and returning too late. And often, without realising it, the investor stops managing risk in a disciplined way and starts trying to anticipate turning points in the market, a Herculean task.

That said, the real question is not "how to avoid bubbles?”, but rather "how to participate in growth trends without allowing excess to compromise wealth?”. In phases of euphoria, the goal should not be to sell everything in search of a top, but rather to improve the robustness of the portfolio. This involves investing with exposure intervals, defining weights and tolerance limits. In the sense that, when a position or a theme grows too much, the investor can choose to partially reduce exposure, without abandoning the investment and preventing the appreciation from turning into a disproportionate bet. In this partial reduction movement, it makes sense to rotate towards higher quality within the same theme, reinforcing exposure to companies with more solid balance sheets, more predictable cash flows, greater visibility on results and less dependence on external financing. It is important to remember that protection rarely results from abrupt movements; it is built through consistent adjustments that reduce fragility without eliminating exposure to growth.

However, the true test of discipline often arises in the opposite phase: when the market leaves euphoria and enters fear. In these moments, liquidity dries up, volatility rises, correlations increase and the narrative becomes defensive. The natural impulse is to wait for more clarity. However, the most interesting entry points arise when uncertainty drives buyers away, when sales are indiscriminate and when the price reflects not only intrinsic value, but also the urgency of those who need to sell.

In these contexts, discipline becomes the most important thing. The first step is to distinguish price risk from solvency risk. A well-constructed portfolio, with an appropriate time horizon, sufficient liquidity and without excess leverage, can withstand temporary declines without compromising the long-term plan. However, a portfolio with immediate liquidity needs, illiquid assets or demanding financing structures may be forced to sell at the worst moment, turning temporary losses into permanent ones.

Once this resilience is assured, the most sensible approach tends to be gradual. In moments of widespread fear, it rarely makes sense to invest everything at once. It is preferable to build exposure in stages, taking advantage of volatility to improve the average entry price and reduce the risk of regret. At the same time, it is precisely in these phases that quality should be privileged, with investment in companies with pricing power, resilient models, low need for refinancing and robust balance sheets.

In essence, the main advantage of a long-term patrimonial investor lies in turning emotional markets into process advantages. And this implies accepting that there will always be moments of apparent irrationality and phases of excessive fear. And it also implies abandoning the illusion that investing well means being right in every tactical decision.

The conclusion of this article is simple, although not very intuitive. Investors should not be afraid of bubbles themselves. The main concern should be the discipline of the investment process, despite these fears. Bubbles will continue to exist because they are part of how markets finance the future before it is fully visible.

That said, bubbles are not the enemy. The enemy is the absence of method. Because what most destroys wealth is staying out of the great structural cycles, selling in panic without a re-entry plan, or allowing the emotional state of the market to replace rationality in wealth management.