Rational humans, forgetful humans

“Unfortunately, it is quite possible to read about Dutchmen thinking that the world had an infinite hunger for tulips, and then go right out and buy some very snazzy computer stock because the world has an infinite hunger for computers.” Wrote Adam Smith in The Money Game.

We met Adam Smith in our previous post. He is not the author of The Wealth of Nations, but used “Adam Smith” as his pseudonym.

Every market cycle, whenever there is something new, we hear such stories. Overtime there are justifications given for the present valuations by extrapolating the current demand into an infinite future.

Read the chapter “On Valuations” in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.

“The four most dangerous words in investing are: ‘this time it’s different’.”: Sir John Templeton said. Every time the justification of current high valuations or even the low valuations comes from such thinking that this time it’s different from whatever happened in the past. After all, in 17th century Holland, when people were chasing tulip bulbs, these were not computers or internet websites.

Whatever the logic, we always have a story. We always have a rationalisation.

#RidingTheRollerCoaster – 192

 

 

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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

Making money looked super simple

“In February of last year, Fortune magazine writers Erin Griffith and Dan Primack declared 2015 “The Age of the Unicorns” noting — “Fortune counts more than 80 startups that have been valued at $1 billion or more by venture capitalists.” By January of 2016, that number had ballooned to 229. One key to this population growth has been the remarkable ease of the Unicorn fundraising process: Pick a new valuation well above your last one, put together a presentation deck, solicit offers, and watch the hundreds of million of dollars flow into your bank account. Twelve to eighteen months later, you hit the road and do it again — super simple.”

The above paragraph is borrowed from a blog post titled “WHY THE UNICORN FINANCING MARKET JUST BECAME DANGEROUS…FOR ALL INVOLVED” dated 21st April 2016. See the link.

Why am I reproducing this line here? What is the point? Well, the point is quite simple. In the world of investing what seems to be too easy does not last for long. Look at the title of the referred post and you would realise how different it is from the opening paragraph.

See our post on similar lines here. Some lines from the same post are reproduced below.

“It was said that you could buy your stock at one door of Garroway’s and sell it at a profit going out of another” – Robert Wernick writes in his book “The South Sea Bubble”, describing the euphoria at the peak of the frenzy.

Few centuries later, the world was entering the digital era.

It looked so easy to make quick profits. Anthony Perkins and Michale Perkins write in their book “The Internet Bubble”: “Day traders might buy an dInternet stock at $94 in the morning and sell it at $96 in the afternoon, in what’s really a form of gambling.”

Making too much money can never be very easy. If it were, everyone would be wealthy by now.

#RidingTheRollercoaster – 137

Making money looks so easy and quick!

“It was said that you could buy your stock at one door of Garroway’s and sell it at a profit going out of another” – Robert Wernick writes in his book “The South Sea Bubble”, describing the euphoria at the peak of the frenzy.

Few centuries later, the world was entering the digital era.

It looked so easy to make quick profits. Anthony Perkins and Michale Perkins write in their book “The Internet Bubble”: “Day traders might buy an dInternet stock at $94 in the morning and sell it at $96 in the afternoon, in what’s really a form of gambling.”

See the similarity between the above lines and what Wernick wrote! Some things do not change!

#RidingTheRollerCoaster – 134

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.

#RidingTheRollerCoaster – 130

The $50 billion Internet company

Appearing before the Financial Crisis Inquiry Commission on May 26, 2010, this is what Warren Buffett had to say:

“The Internet was going to change our lives, but it didn’t mean that every company was worth $50 billion that could dream up a prospectus.”