The Difference Between a Bubble and a Cycle

A brilliant post by Morgan Housel …

Brace yourself. According to various media sources, we now have at least 14 bubbles. This probably refers to the US media sources and maybe Canadian and European, too. In the Indian context, one can add a few more bubbles in the list.

Read this brilliant post highlighting the difference between a bubble and a cycle.

Brace yourself. According to various media sources we now have at least 14 bubbles

#RidingTheRollerCoaster – 252


What goes up …

Sooner or later – often sooner than anyone expects – what has gone up will come down. Likewise, whatever has gone down will rise again, typically when the experts least expect it.

  • From the introduction to the book “The Devil’s Financial Dictionary” by Jason Zweig


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The financial past – rhymes

The financial past doesn’t repeat itself exactly, but it rhymes. Human nature never changes, no matter how vociferously someone tries to tell you that this time is different. Fads come and go, but fees are forever. On Wall Street, everything has been tried before. Whatever it is, it will almost certainly turn out the same this time as last time.

  • From the introduction to the book “The Devil’s Financial Dictionary” by Jason Zweig


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Is this the right investment?

Once again, I came across this question from an investor, “I have invested in such and such avenue. Is it the right decision?

On probing further, one gets the answers, which have by now become highly predictable for me.

In almost all cases, the investment avenue has a lock-in provision, which means the investor cannot get out of the investment even if one realizes that it is not a right instrument. Why, then, this question keeps surfacing after one has locked-in the money? Is it ok to assume that one did not ask this question before signing the cheque?

Doesn’t it make sense to ask questions BEFORE signing the cheque?

We learn from the story of Abhimanyu that it was easy to get into the chakravyuh, but without knowledge, it was difficult (sometimes impossible) to get out of it. Same applies to an investment with lock-in. Buying is easy, getting out is not.

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Behaviour gap

In our last two posts, we discussed about why understanding psychology is important for investor success. Links to both the posts are given below for a quick reference.

  1. Why understanding investor psychology is important
  2. Why understanding investor psychology is important – 2

In many cases, one observes that what the investor takes home is far less than what the investment avenue generates. Nick Murray and Carl Richards call it the “Behaviour Gap” – a wonderful term coined to explain the role of human behaviour in taking financial decisions. The “gap” in behaviour gap pertains to the negative impact of the human behaviour on investment returns.

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Why understanding investor psychology is important – 2

Continuing from yesterday’s post:

While the various assets would generate various kinds of investment returns, be it current income (in form of rent, interest or dividends) or capital growth over the years, it entirely depends on the behaviour of the investor as to how much of it one takes home.

This gap between what an investment generates and what an investor gets depends on costs (transaction costs, holding costs, maintenance costs, etc.), taxes and investor psychology. To some extent, the former increase due to unstable mind of the investor.

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Why understanding investor psychology is important

he subject of behavioural economics, or behavioural finance, or plain simple investor psychology has been around for decades. However, it came into limelight only in last few years. Today, more number of people are talking about this subject.

This is not new. The role of emotions in our daily life has been explained by our Upanishads. As the famous Amrit Bindu Upanishad says


(The mind alone is the reason of our bondage or our freedom.)

The fact is, ever since humans started dealing with other humans – even before money was invented – the relation between price and value has always been a subject of debate. There have been opinions justifying the price for the value and there are opinions questioning the price with respect to the value. Probably trade happens only due to such differences in opinions.

However, when cold logic is applied, it is often difficult to arrive at a decision. Add a pinch of emotions and you are able to arrive at a conclusive decision and act on it.

However, emotional decision making has its own flaws.

It is important to understand the role of emotions in our life and the flaws associated. These emotional flaws reduce the upside in case of our financial decisions or they increase the costs and the risks.

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