Vernon Smith won the Noble prize for economics in 2002. His experimentswith students involving simulated trading games, proves that “efficient” markets do not exist and that bubbles occur even the “traders” know what they are doing. Human beings seem bred to trade and speculate; and that leads to bubbles.

His work does lead to a few pointers that may benefit the average investor. I quote from an article in the Atlantic Magazine:

The people who make the most money in these experiments aren’t the ones who stick to fundamentals. They’re the speculators who buy a lot at the beginning and sell midway through, taking advantage of “momentum traders” who jump in when the market is going up, don’t sell until it’s going down, and wind up with the least money at the end. Bubbles start to pop when the momentum traders run out of money and can no longer push prices up.

Thus two simple rules that follow from his work:

First, beware of markets with too much cash chasing too few good deals. When the Federal Reserve cuts interest rates, it effectively frees up more cash to buy financial instruments. When lenders lower down-payment requirements, they do the same for the housing market. All that cash encourages investment mistakes.

Second, big changes can turn even experienced traders into ignorant novices. Those changes could be the rise of new industries like the dot-coms of the 1990s or new derivative securities created by slicing up and repackaging mortgages.

This isreasonable enough advice for those investing in mining stock.