Understanding the roller coaster

“Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” – the title of my maiden book.

Someone remarked about the title stating that while roller coaster takes you to the same place once the ride is over, the markets may take you to higher levels. I do not disagree nor do I have an argument against this line of thinking. However, read the subtle message of the book and you would realize that we are referring to two roller coasters – one in the financial markets and the other inside all of us – the emotional roller coaster.

So what really do we mean by the roller coaster? The roller coaster is at two places – one in the markets and the other in the mind. While the above discussion may be correct about the market that it may not come back to the same place, the mind comes back to the same place often. We forget the lessons learnt and repeat the mistakes all over again. The mind often is more volatile than the financial markets. Our reaction to the happenings in the market leads to behavior that may not be in our right interest.

The book is not about doing away with the roller coaster in the market (which refers to the bumpy ride), but to understand the roller coaster that is present in our mind.

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Rational humans, forgetful humans

“Unfortunately, it is quite possible to read about Dutchmen thinking that the world had an infinite hunger for tulips, and then go right out and buy some very snazzy computer stock because the world has an infinite hunger for computers.” Wrote Adam Smith in The Money Game.

We met Adam Smith in our previous post. He is not the author of The Wealth of Nations, but used “Adam Smith” as his pseudonym.

Every market cycle, whenever there is something new, we hear such stories. Overtime there are justifications given for the present valuations by extrapolating the current demand into an infinite future.

Read the chapter “On Valuations” in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.

“The four most dangerous words in investing are: ‘this time it’s different’.”: Sir John Templeton said. Every time the justification of current high valuations or even the low valuations comes from such thinking that this time it’s different from whatever happened in the past. After all, in 17th century Holland, when people were chasing tulip bulbs, these were not computers or internet websites.

Whatever the logic, we always have a story. We always have a rationalisation.

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Do you know yourself?

Wonderful line from Adam Smith’s book, “The Money Game”

“If you don’t know who you are, this is an expensive place to find out.”

He was referring to the game called investing.

(And by the way, this is not the Adam Smith of “Wealth of Nations” fame.)

I have come across many investors who can’t tell whether they are investors or traders. Many don’t even know that they don’t know. Many invest money based on tips and some others buy on dips – both don’t know what they are doing.

Let us remember the famous last words of Jesus Christ, “Father, forgive them, for they don’t know what they are doing.” Well, while God might have heard the prayer of his Son, investment markets may not be so kind.

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Heroes to zeroes and vice versa

Borrowed the following from the book, “The Money Game” by Adam Smith:

Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: “Many shall come to honour that now are fallen, and many shall fall that are now in honour.”

The markets are more powerful that each individual player. There are reputations made and shattered especially at the time of turn of events. The market cycles have the reputation of making and breaking the reputations (and fortunes) of many.

Read the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to know about such stories ranging from Sir John Templeton, Warren Buffett, Benjamin Graham, Prof. Irving Fisher, Mary Meeker, Alan Greenspan, Harshad Mehta, Ketan Parekh, Sir Isaac Newton, Julian Robertson, Prof. Irving Fisher ….

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Why people make forecasts

Interesting blog post on forecasting:

“Why are there entire businesses setup to make forecasts?  The answer is quite simple; forecasting exists because there is a giant market for it.  Investors/traders thirst for forecasts.  Here is the real question; why do investors want to hear/read forecasts?”

Click on the link below to read the entire post:

Why some make forecasts

 

 

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A must read for everyone …

Lessons from financial market cycles is a must read for everyone . Learnings from various financial cycles have been put together for readers by Amit in a very simple way , easy to understand . One should Learn from these cycles and learn to invest when others r fearful and disinvest when others are greedy.