It does not matter if it was the blow off in stocks in 2000 or the blow off in housing in 2006, the vast majority of those involved in markets wipe out.
The cause is riding emotion, the excuse to start investing will almost always be research. The research will usually boil down to:
- historic trends
- tips from acquaintances and friends - equally as ignorant of reality as the majority
- believing those providers of research with a vested interest in motivating the investor to act.
A wave is always most exciting where it crashes on the beach or in the rocks.
Speculation will be blamed when the emotional mass throws their money at the waves most dramatic moments - just prior to the roaring finale. That is not speculation, that is gambling in a casino where the financial news media makes noises like chips hitting the tray of a slot machine.
Soothing voices will call the emotional frenzy "investment" and urge all to come aboard. After the waves crash responsible voices will proclaim everyone was duped by manipulative speculators. In reality the frenzied mass did not need to be manipulated - they have willingly manipulated themselves.
Some will proclaim "truths" such as for any five year period in the years 1975 to 2000 the market always rose. These are in reality no different than stating a ball at roulette dropped into red three times in a row; there are many that will now be assured that it can't happen again or is a trend and must happen again. In reality the odds remain the same as before the trend, or after it ends.
The third wave set is always biggest - trust me dude.
You will hear that the crowd is always wrong, that is not exactly true. The crowd, your friends and acquaintances, can be right for quite a while in the middle of a wave - they just wont be able to cut out and exit when the wave ends. The crowd is only always wrong at extremes.
Those most prone to manipulation would be professional advisers. They make money off the crowd - and an excited feeding frenzy gets them excited also. There is a proverb that it is always easiest to sell to salesman, they will convince themselves a product is good before they sell it.
The honest ones sincerely believe what they tell you - but they can be sincerely wrong. A broker understands selling his product - if he understood the markets he could make more speculating himself. As Mark Twain said "A gold mine is a hole in the ground with a liar standing next to it." The salesmen can sell even better if they ignore reality and choose to believe the lies.
Speculators don't need to manipulate markets - the crowd will manipulate themselves, the speculators just need to position themselves for profit. Enter a market when it is boring, get out prior to the peak of excitement. The sunsets are beautiful when the chop and surf quiets down and it is time to wait for sunrise to re-enter the markets
As Surfer Bill said:
"There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures."