A reader of our blog asks, “We had the tech bubble – marked by people buying stocks that had no earnings.  We had a housing bubble – marked by the subprime debacle.  My question is where is the next bubble, how can I play it in the initial phase to benefit from its formation and what would the signals be going forward that would alert me to the fact that it’s time to lighten up?” 

That’s a great question, one which Jeff and I ask ourselves from time to time.  And since it is a two part question, I’ll answer it with a couple of posts over the coming days.  But for this post, let me just say that if bubbles have taught us anything, it’s that the pain of overdoing it can far exceed the early pleasures.  The siren song of an “easy entry and early exit” — if you allow us to strip your question down to its basic premise —- has an almost ecstatic allure to it.  And as with all such things, some caution is warranted.        

In a simple word, diversify.  Unless you were a homebuilder or a technology company earlier in the decade, there was no need to be invested like one.