Panic

Michael Lewis writes in the opening chapter of his book “Panic”,

The striking thing about the seemingly endless collapse of the subprime-mortgage market is how egalitarian it has been. It’s nearly impossible to draw a demographic line between the victims and the perps (perpetrators)

Millions of ordinary people ignorant of high finance have lost billions of dollars, but so have the biggest names on Wall Street …

Both underestimated the likelihood of an unlikely event: a financial panic.

In retrospect, the small army of Wall Street traders who lost tens of billions of dollars in subprime-mortgage investments looks as naïve and foolish as the man on the street.

But there’s another way of viewing this crisis.

The man on the street, for the first time, acted on the same foolish principals that have guided the behavior of sophisticated Wall Street traders for the past few decades.

“Panic” – it is not about how much money you have – panic may strike with least regard to your financial status, your social status, your position in business …

#RidingTheRollerCoaster – 211

Advertisements

“Anything can happen” – says the Reformed Broker

More than a decade and a half later, once again the DotCom business is in the news in the investment world. Look at the valuation of the poster boy of DotCom – Facebook. It just surpassed the valuation of Berkshire Hathaway, the investment company of Warren Buffett.

Read this interesting blog post by Joshua Brown, the Reformed Broker.

#RidingTheRollerCoaster – 210

Why nobody saw it coming?

During a visit to the London School of Economics in October 2008, Queen Elizabeth II, British Queen of the United Kingdom wondered: “Why did no one see it coming?”

It is not that no one saw it coming, just that probably no one knew the exact date. This repeats in every market cycle – whenever the rising markets start falling or whenever the falling markets start rising – it is not possible to know well in advance when exactly something is likely to happen.

#RidingTheRollerCoaster – 209

Humour in turbulent times

There is a popular saying in the stock market, “Bulls make money, bears make money, but pigs get slaughtered.” However, the year 2008 was different. This year saw the death of a bull (Merrill Lynch) and a bear (Bear Sterns), but the pig (Piggy bank – people who kept money outside the markets) survived.

#RidingTheRollerCoaster – 208

“Will the market fall?” – A wrong question to ask …

Here is a very interesting paragraph from Ronnie Screwvala’s book Dream With Your Eyes Open – An Entrepreneurial Journey:

Understanding and accepting failure now will give you the clarity and the resolve you need to survive the big bumps. No matter who you are, how solid your connections, your financial status, or any of the thousand other factors that determine success of a business, understand one thing: At some point, you’re going to fail. And not just once. Internalise that reality and make it part of your entrepreneurial and leadership DNA. The only question you need to answer is: When I fail, how will I respond?

A wrong question to ask for any entrepreneur is: “Will I fail?” The correct question to ask is: “How do I respond when I fail?” Similarly, the wrong question to ask is, “Will the market fall?” The right question is “When the market falls, how do I respond?”

Asking this second question is all about preparedness. We have repeatedly said in the book Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget: “If you cannot predict, protect”. And protection must start with preparedness.

He further adds:

What’s worked for me over the years is to recalibrate and consider my worst-case scenarios, gauge my ability to cope, and work on viable solutions without panicking. Once you can do that, you’re already on the road to recovery.

This is also important to be a good investor. And in order to recalibrate and consider your worst-case scenarios, it is important to read the history and see the follies of others in the past. You do not need to walk the whole path all over again. You can start with reading Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget. The book highlights many episodes that happened in the world of financial markets and how people responded to the situations.

Learn from the events and learn from the way people responded. You would be able to build a solid investment strategy for yourself. If you are an investment advisor, it would help you build investment advice for your clients. You may also consider gifting the book to your clients as reading the same would help them appreciate your perspective.

#RidingTheRollerCoaster – 207

How is the market?

I have often wondered about the way certain discussions take place. many times, one has come across the question, “How is the market?” and the person to whom the question is asked, answers, “good” or “bad”. The market is considered to be good when the prices are rising and “bad” when they are falling. This is surprising since low prices cannot be good for both the buyer and the seller.

#RidingTheRollerCoaster – 206

Sir John Templeton on bear markets …

Sir John Templeton further writes in the forward to Roger C Gibson’s book “Asset Allocation – Balancing Financial Risk”:

It is only common sense to prepare for a bear market. experts do not know when each bear market would begin, but you can be certain that there will be many bear markets during your lifetime. Commonsense investing means that you should prepare yourself both financially and psychologically. financially you should be able to live through any bear market without having to sell at the wrong time. in fact, your financial planning should provide for additional investment funds so that you can buy when shares are unreasonably low in price. Preparing psychologically means to expect that there will be many bull markets and bear markets so that you will not sell at the wrong time or buy at the wrong time. to buy low and sell high is difficult for persons who are not psychologically prepared or who act on emotions rather than facts.

We have mentioned in the book, “If you cannot predict, prepare.” Nobody better that Sir John Templeton to advice on preparation and articulate what that preparation is.

#RidingTheRollerCoaster – 205