ONE OF the challenging behaviours we face in our lives is our natural ability to construct a plausible narrative to explain past and current events. We can all rationalise some adverse events as bad luck, but often find a plausible reason to justify good fortune.

This can be particularly costly when considering share price valuations and markets. Looking back, markets have experienced some incredible bursts of euphoria, which I’m sure appeared plausible at the time but look like madness with the advantage of an historical perspective.

Remember Tulipmania in Holland in the 1630s? At first, everybody gained as new strains of tulip bulbs came to the market. The rise in prices attracted speculators and prices kept going up. Some individuals became suddenly rich and their prosperity attracted more investors. The crash, when it came, was so severe that the entire Dutch economy was in crisis.

Similarly, many readers will remember the tech bubble of the late 1990s. Some tech businesses achieved market valuations in the hundreds of millions of pounds but without profits or cashflow to sustain them. Many are not around today.

As so often happens, the ends comes when the flow of new money finally stops and the rush to the exit really brings the analogy of a deflating balloon into perspective.

The line separating investment and speculation is never clear at the beginning. However, it becomes blurred when the perception of free money enters the investor psyche. Which brings me on to Bitcoin. I knew it was getting frothy when I was being asked about it in every casual conversation and my daily inbox began to offer “exciting” investment opportunities. Some of the early Bitcoin investors filled the press and airwaves and forecasts were made over future potential returns. The price chart was looking vertical and it rose to almost $19,000.

At the time of writing, it is nearer $9,000. The reason for this fall is not clear but it appears that for several reasons some speculators wanted to sell and the rush to the door became overwhelming.

I am not against so-called cryptocurrencies. However, to be of any use a currency has to be legal tender and accepted by banks and other retailers to purchase goods and services. Governments create currencies and through their Central Banks are able to provide confidence in that currency as a means of exchange. While some individuals and businesses do agree to accept Bitcoin, it is still some way off a useful tool to carry in my pocket or telephone.

I am more sceptical about viewing Bitcoin as an asset class worthy of speculation. While traditional currencies vary, due to the prospects for the issuing country, inflation or interest rates, it is hard to argue that the £10 in my pocket should buy more this afternoon than it could this morning. The high volatility in the price of Bitcoin suggests that the movement has more to do with speculation than any reappreciation of the value of the convenience of the underlying technology.

It is arguable that we are again in the midst of another technology bubble, with the sector now accounting for around one third of both the S&P 500 and MSCI Emerging Index. With many of the last businesses no longer trading, it is a brave investor who is confident in their forecast of identifying the businesses that will dominate future technology.

For long-term investors, it is key to focus on industries where there are fewer surprises and where one can have confidence in earnings estimates. One cannot forget the importance of balance sheet strength and cashflow. It is, then, important to consider risk by how wrong forecasts could reasonably be, rather than consider any comparison to a sector or market weighting.

Lastly, and most importantly, follow the investment process as it is designed to provide support when the speculative mist is rising and the feeling of missing out is at its highest.

Graham Campbell is chief executive at Saracen Fund Managers.