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


Intellectual and emotional level understanding

On an intellectual level, most investors have no trouble understanding the notion that high past returns result in high prices, which, in turn, result in lower future returns. But at the sam time, most investors find this almost impossible to accept on an emotional level. By some strange quirk of human nature, financial assets seem to become more attractive after their price has risen greatly. …

… If prices fall drastically enough, they become the lepers of the financial world. Conversely, if prices rise rapidly, everyone wants in on the fun.

William Bernstein wrote in “The Four Pillars of Investing – Lessons for building a winning portfolio”.

Eventually, it’s all in the mind. The value of an asset is always in the way it is perceived. When you think of market price, it often gets misleading. The crowd sets the prices of the assets and the crowd depends on the same. This often becomes a vicious or a virtuous cycle. The crowd leads itself astray.

Here is an excerpt from the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

Speculative euphoria as the Pied Piper

Large-scale speculation in any asset is a recurring phenomenon. History suggests that every now and then, we will witness euphoric activities – the asset may change, the people may change, the place may change; but there will always be some such events at an amazing regularity.

This is the period when common sense takes a back seat. Incidentally, the current indicators, all point in only one direction – that of the current momentum. The Pied Piper of speculation is at work. Just like the story above, the music is heard only by those who get into the spell of the market and they cannot control themselves from following it. In the story, the Pied Piper took the children to the other side of the hill never to return. In real life, the Pied Piper of speculation takes investors’ money to the other side of the mountain (called expensive markets).

People chase the hottest fad assuming that this is never going to end. The immediate past is extrapolated into infinite future.

#RidingTheRollerCoaster – 175

Market Kaisa lagta hai?

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. Ditto for high prices.

#RidingTheRollerCoaster – 64

Irony of the bear markets …

While Greece was in the news, many across the world expected a market meltdown on Monday, 29 June 2015 as the markets opened after a weekend. Motley Fool twitted, “All past bear markets look like opportunities. All future bear markets look like terrifying threats. Understand the irony in this.”

It is an interesting as well as sobering thought! Many an investors have tried to analyse the situation at Greece. Many theories are floating around. Most are attempts to find the villain in the episode. Many have tried to find the reason behind the crisis with an objective to stop repeat of such a situation.

This is not the first time. History is replete with examples of ups and downs, booms and busts, bulls and bears. That is the very nature of capital markets.

Bob Swarup writes in his book, “Money Mania – Booms, Panics, and Busts from Ancient Rome to the Great Meltdown”: Rises and falls are as natural and vital to the economic condition as breathing is to the human condition.”

There is a roller coaster out there. This roller coaster impacts the human thinking. While taking decisions, often the emotional mind overpowers the rational mind. Many of our decisions are influenced by the emotions and we commit mistakes time and again.

While there is one roller coaster going on in the financial markets, our minds are going through an emotional roller coaster – swinging between greed to fear.

Any attempt at identifying “why this happens” is futile. It serves no purpose. We are unable to stop the next crisis. Very often, the solution to one crisis leads to the next one. The solution itself becomes the reason for the next one.

Accept that the markets are cyclical and the ups and downs are part of the nature of financial markets. Instead of attempting to stop or predict the cycles, one would be better off to find how one could protect one’s financial situation, including one’s investments.

But, we forget the lessons. Today, hardly anyone is talking about the Greece problem. Ever since China stole the limelight, Greece was forgotten. The Greek tragedy was replaced by the Great Fall of China. And life goes on …

  • Amit Trivedi, Author of “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”
  • These are the author’s views and should not be construed as investment advice.

What is the book about …

Events spread over a period of five centuries and involving four continents; vehicles of investment or speculation ranging from equity to fixed income to derivatives to real estate to…hold your breath…tulip bulbs!
The market prices of instruments fluctuate wildly during these events, giving rise to numerous theories on what could and should have been done to preempt them. But why do these events keep recurring from time to time? Is it possible to foretell such episodes? Can they really be preempted?
When such market tsunamis occur, large and small investors, alike, burn their fingers. Governments and regulators try to intervene with measures that seem too little, too late. Great nations are brought to their knees while they seek out someone to blame in the aftermath.
Against this backdrop, what should investors do? What are the lessons they can learn?
A veritable page turner, Riding the roller coaster is packed with information and insights on the subject and yet extremely lucid to read. It talks to simple investors, narrating, cautioning and advising in its uniquely wise and witty tone.
As a “seat-belt” for the next financial market roller-coaster ride, and all those that will follow, this book remains evergreen and begs revisiting from time to time to ensure that we refresh our memory of Lessons from financial market cycles we forget.