This post is a summary of a private discussion I’ve had with reader Josh regarding my post on spotting investment bubbles. He asks:

When could I reasonably expect my Atlanta condo to be worth what it was 4 years ago when I bought it?

I thought the discussion and similarities I outlined could benefit other subscribers.

While cruising some stock charts yesterday, I noticed that Priceline.com made a very positive earnings announcement and the stock shot up around 15 percent to $150 per share on the news. Nice move, and I’m glad for anyone who bought the stock — recently.

Having been an active investor during the tech bubble, I can remember the roller coaster ride that is Priceline’s stock like it was yesterday. William Shatner’s favorite do-it-yourself travel agency nearly touched $1000 per share only to trade in the low $10 range just two short years later. (Note this is a share adjusted chart after multiple stock splits.)

Which got me thinking, if you had bought near the top of the bubble when everyone around the water cooler was in 100% agreement that tech stocks were the best buy and hold investments ever conceived and even God himself couldn’t sink the stock market, how long would it take to actually make your money back if you had continued to hold your shares.

How Long Until I Make My Money Back?

In this case, the short answer is the jury is still out. At present, you would have waited 9+ years and you’re still waiting to break even.

For example, let’s just say you bought 50 shares of Priceline.com in January 2000 at $400 per share (I’ll ignore that huge peak near $1000). You’re now on the hook for $20,000 of Priceline.com stock.

If you did not have a stop loss order in place or have a planned exit strategy, you likely rode your investment all the way to the bottom hoping it would one day make it back to $400 so you could sell and break even on your investment. You may have even gotten frustrated by your foolishness, and sold years later to harvest the tax losses.

If you’re still holding onto that stock today, you’ve seen a decent recovery in the last 2 years, but you’re still holding a onto a loss of $250 per share, or $12,500.

Similarities between the Tech Bubble and Housing Bubble

If you bought a home within the last few years, you’re likely looking at a similar situation. Just take a look at the massive spike above the 60 year, post World War II trendline.

See any similarities?

So if you’re currently underwater on your mortgage or you expect to be in the near future (estimates say as much as 50% of Americans with a mortgage are expected to be underwater by 2011), it’s likely you will still be underwater for many years to come. A lower demand for housing, the excessive amount of inventory, and banks reverting to more conservative lending standards are all working against you.

Granted, the bubble has affected some real estate markets more severely than others, but the best way to prevent such huge losses in the first place is to learn how to identify the bubbles as they are forming.

If you don’t learn the warning signs, or you bought a home without doing any research, then you’re left to absorb the losses or patiently wait for the next bubble to come along.

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