Easy to make money

When it seems to be very easy to a large number of people to make money, the risk is at the highest.



The seeds of the crash are planted in times of the boom and vice versa

The proximate causes of these successive crisis are very different – emerging market debt problems, the new economy bubble, default on asset-backed securities, the political strains within Eurozone – yet the basic mechanism of all these crises is the same. They originate in some genuine change in the economic environment: the success of emerging economies, the development of the internet, innovation in financial instruments, the adoption of a common currency across Europe. Early spotters of these trends make profits. A herd mentality among traders attracts more and more people and money into the asset class concerned. Asset misplacing becomes acute, but prices are going up and traders are mostly making money.  …

… Yet reality cannot be deferred forever. the misplacing is corrected, leaving investors and institutions with large losses. Central banks and governments intervene, to protect the financial sector and to minimise the damage done to the non-financial economy. that cash and liquidity then provide the fuel for the next crisis in some different area of activity. successive crises have tended to be of increasing severity.

The above paragraphs have been taken from John Kay’s book “Other People’s Money – Masters of the Universe os Servants of the People”.

Different market cycles appear different, but there is a lot of similarity in each. I have written about the anatomy of a market cycle in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” that echoes the above words to a great extent. If you observe, the parallels are often staring you in the eye. However, very often, we choose to ignore the signals.

The seeds of the crash are planted in times of the boom and vice versa. As Lord Krishna tells Arjun in the Bhagvad Geeta

Bhagvad geeta 2-27

#RidingTheRollerCoaster – 174

Herds galore …

We see many examples of herd mentality in the financial markets. Tulips were a huge craze in Amsterdam in the early 1600s. Dot-Com companies became a rage in 1999-2000. Both these were examples of greed. However, post the sub-prime crisis, when stock markets crashed in India, fear made people flock to the safety of capital protection products and LIC’s Jeevan Aastha – a guaranteed return (but lower than inflation) product.

#RidingTheRollerCoaster – 150

Investing in IPO and herd mentality

Herd mentality is clearly visible during IPOs. Many investors want to know the subscription numbers thus far before lodging their application. Very often the success (in collection) of an IPO depends on the subscription amount in the initial few minutes after opening of the IPO.

IPOs fail to get subscriptions if the initial response is poor and vice versa.

This is nothing but herd mentality at play. This is an example of outsourcing investment research and thinking.

Be careful. Invest in an IPO only based on the merit of the issue and only if it fits into your personal investment plan.

#RidingTheRollerCoaster – 146