How to create a speculative bubble and profit

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Recently I read an enlightening story in the New York Times about the Pu'er tea bubble in Yunan, China.  The burgundy fermented teas fetched prices of $150 a pound at the peak, but now sells for less than a tenth of those prices.  I have actually been to one of those tea houses in Yunan, and I have also seen the rise and burst of the housing bubble in America.  These experiences make me think that there is a certain formula to creating a speculative bubble out of anything, and here is what I have gathered.

1. Create a magical backstory for your product  - In the tea houses of Yunan they told us the story of the accidental invention of Pu'er, and how it cures many diseases and also aids dieting.  In America homeownership is touted as "The American Dream".  Both of these products were given an emotional and almost mystical backstory that made people covet them.  The magical backstory should make people believe that they will be improved in some manner by your product, and that owning your product is an ideal to strive for.

2. Market your product as an investment  -  After people start to buy your products, it is important to make people believe your product is a great investment. In the tea houses they told us that they buy antique teas back as if they were gold, and paid more for older teas. Thus they have a saying that Pu'er gets more valuable as it ages.  It sounded a bit incredulous, but it was also attractive.  In America, I have no idea how many times I have heard that a home is the best investment you can make.  Once money is involved, the product also appeals to greed.

3. Pump and dump - If you have a bit of capital, a great way to inflate the bubble is by buying up a lot of the product being promoted and then selling it to new people caught up in the fervor.  In Yunan wholesalers bought teas back at a markup of nearly 30% a year and then sold it again to new "investors".  In America there was a frenzy of flipping homes by individuals and large corporations that bought up land.  The same happened during the dot com bubble, when investors that bought into the high technology religion snapped up every related stock they could find and quickly drove up prices.  The key is to dump all the inventory before the demand dries up, and that is the hardest thing to do.

A classic book about speculative bubbles is Extraordinary Popular Delusions and the Madness of Crowds written  by Charles Mackay  in 1841. It details the dangers of mob mentality in investing and other aspects of life. Indeed, it is very difficult for one person to blow up a gigantic speculative bubble.  It took entire industries and various government efforts to inflate the asset bubbles we have seen in recent years.  I have no doubt that we will see more asset bubbles in the future, as they are testaments to human nature.  The key to surviving them and maybe make a profit is to keep your emotions in check, and do not be so greedy that you are left holding the bag.  Of course, this is all easier said than done.