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.

#RidingTheRollerCoaster

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Market at all time high …

Sensex at 31,000 and Nifty above 9,500 – what should you buy?

In these times, the best investment would be to buy “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” and read it.

#RidingTheRollerCoaster

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.

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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.

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Hindsight is 20:20

Whether it is euphoria or panic, it is often only in hindsight that we can clearly see what it was. At the time, it often appears to be the truth. Every action appears to be rational and based on some fundamental factors.

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Game changers and bull markets

In many of there major bull markets, there are visible gains on account of some breakthroughs: In the 1920s, it was three innovations, viz. electric power, telephones and automobiles (more specifically, Henry Ford’s assembly line). All three technologies were around a couple of decades old, but the gains were visible only in the 1920s. Similarly, the internet brought about major technological gains in our lives almost a century later. Once again, this invention was a couple of decades old by the time the gains were visible.

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