Understanding the roller coaster – in the words of Charles Dow

Source: Understanding the roller coaster

Read the above post and compare it to what Charles Dow had to say: Each cycle is the peculiar product of a particular moment in economic and political history, but in Dow’s view the force behind each go-round was the same: human nature.

Enjoy the roller coaster!

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Seeking patterns

Man is a pattern seeking animal. We see patterns where none may exist. We have seen Ganesh idol in the clouds and we have seen India map on highways between trees.

Those are fine, so long as our lives are not affected. However, when one starts putting serious money while looking at patterns, one may be in for a very big surprise.

Take for example, the recent successful IPO and a blockbuster listing of Avenue Supermart – the D-Mart company.

The success of this IPO brought out some pretty interesting observations from people:

  1. What is common between R K Damani, Rakesh Jhunjhunwala and Nimesh Shah? There wives’ names are “Rekha”. So now you know what to do to become wealthy.
  2. The most successful people wear the same clothes to office daily – e.g., Steve Jobs, Mark Zuckerberg, R K Damani. So you know what is required to be successful.

Now, in both the cases, someone has picked up a trait common to some of the successful people (some and not all) and jumped to an easy conclusion.

It was exactly this kind of thinking that led droves of investors to buy any company with “Technology, or “Software”, or “Infosys” in the name during the tech boom. It was exactly this kind of thinking that people biought into emerging markets between 2003-08.

History repeats – it is just that the players change, but many things don’t – human behaviour being one such thing.

“Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” is a book that is full of many such examples.

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Valuation theories

“… the problem was not that no one cared about intrinsic value. Rather, by the late nineties it seemed that few even believed in the concept.” From the book “Bull” by Maggie Mahar

A classical sign of a raging bull, when the old valuation theories are thrown out of the window and new justifications are being presented – and these are justifications of the current situation only.

Read the chapter “On Valuation” for further details …

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Uncertainty

“More than anything, Wall Street craves certainty.”

From the book, “Bull” by Maggie Mahar

The reality is: the future is always uncertain. Those who can see the future are called visionaries, but majority are randomly right while knowing the unknowable.

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What is a no-brainer investment?

“It was a no-brainer: higher risk equals higher return. What junk bond investors had forgotten is that higher risk does not guarantee higher returns; it merely offers the chance of higher returns. When they closed their books on the eighties, they discovered that they had lost the gamble. Ovewr the course of the decade, money invested in the average junk bond grew just 145 percent – substantially less than the 177 percent investors would have earned in US Treasuries, without taking any credit risk whatsoever.”

Whenever someone says an investment is a “no-brainer”, one is indicating that you don’t need any brains to figure out that there is money to be made.

However, in real life, majority of such no-brainer investments turn out to be no-brainers in another way: You do not need any brains to understand the high risk involved.

Be careful. Losing an opportunity is far better than losing your capital.

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Riding The Roller Coaster recommended by Brijesh Dalmia

A leading financial planner, a mutual fund trainer, a leadership trainer, and a leader himself Brijesh Dalmia recommends “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”. The book features in the list of suggested reading for IFAs.

Thank you Brijesh!

You can read the article here.

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