The next financial bubble

Attendee at a seminar: “There are bubbles in the market every now and then. What are the indicators of the next bubble?”

Expert speaker: “The day you stop thinking of this question, that is an indication of the next bubble.”

When everyone is hundred percent sure that the markets can only rise up, that is the time to be cautious.

Sir John Templeton has said, “Bull markets are born on pessimism, gorw on skepticism, mature on optimism and die on euphoria.”

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Do you know the future?

It amazes me how frequently the same questions keep coming back.

Some of the most common questions are:

  • “Which mutual fund schemes are the best according to you?”
  • “Which is the best mutual fund? Or best stock? Or best investment?”
  • “What is your view on the market?”
  • “Should I invest now or wait for some time?”
  • “I have invested in ********* mutual fund scheme(s). How much returns should I expect?”
  • “I have invested in ********* mutual fund scheme(s). Are these good schemes or do I need to make any changes?”

All the above questions have one thing in common – an attempt to know the future. It seems the entire business of investment management may be about predicting the future. And the investment expert is a professional forecaster.

The fact is, most have failed to correctly predict the future events – even the best of the investors. Let us see some examples and we need not go too far in the past. In the last seven months of the year 2016, the world witnessed three major events taking place in three different parts of the world.

First in the month of June, the people of Britain voted for exiting the Eurozone during the referendum, whereas majority had predicted that Britain would remain in the Eurozone.

On November 8, while many experts were expecting the US to get the first ever lady President, the result was very different.

In both the above cases, while there were only two possibilities, the actual result was exactly opposite of the popular opinion.

On the other side of the world, on the same day, November 8th, the currency notes of Rs. 500 and Rs. 1,000 were pulled out of circulation. I am sure nobody had any idea about this. No forecaster could predict such an event happening.

Continue further on the US election results, majority of the market experts and economists had expected that a Trump victory would spell disaster for the US. What happened in reality? Post the announcement of election results; the US Dollar has gained against almost all major currencies of the world. Can someone say that the fall of the Dollar was already factored in the price and hence post the victory of Donald Trump, the Dollar only recovered? Well, even that argument does not hold water, since majority was of the view that Hillary Clinton would win the election. There was no question of the unexpected being factored in the price. So, it was not a case of a political forecast gone wrong, but also a market forecast going wrong.

Sir John Templeton has famously said, “Buy value, not market trends or the economic outlook.”

The subject of investment management for most retail individual investors is to ensure enough money is available at the time of one’s life’s financial goals. In such a scenario, one must manage the investment risks such that the money becomes available at the time of need.

For that purpose, the important thing is to understand what can go wrong and how to protect one’s investments. Forecasting the future is not required.

  • Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

#RidingTheRollerCoaster

History repeats …

Look at this interesting article about Indian start-up boom of recent times:

Dotcom deadpool returns as India’s start-up boom turns to bust

Sir John Templeton has famously said, “The four most dangerous words in investing are: ‘This time it’s different’.”

#RidingTheRollerCoaster – 225

 

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

 

 

Heroes to zeroes and vice versa

Borrowed the following from the book, “The Money Game” by Adam Smith:

Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: “Many shall come to honour that now are fallen, and many shall fall that are now in honour.”

The markets are more powerful that each individual player. There are reputations made and shattered especially at the time of turn of events. The market cycles have the reputation of making and breaking the reputations (and fortunes) of many.

Read the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to know about such stories ranging from Sir John Templeton, Warren Buffett, Benjamin Graham, Prof. Irving Fisher, Mary Meeker, Alan Greenspan, Harshad Mehta, Ketan Parekh, Sir Isaac Newton, Julian Robertson, Prof. Irving Fisher ….

#RidingTheRollerCoaster – 190

Pillar two: History of financial markets

William Bernstein wrote a classic “Four Pillars of Investing”. It is a must read for any student of investments.

In the chapter “Introduction”, he writes that the second pillar of investing is knowledge of history. He writes:

… a study of previous manias and crashed will give you at least a fighting chance of recognising when asset prices have become absurdly expensive and risky and hewn they have become too depressed and cheap to pass up.

… the investor who is unaware of financial history is irretrievably handicapped.

Those who are interested in removing this handicap cannot ignore studying the history.

And this is what I have written in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”:

In the beginning, all the events looked different. In spite of the apparent differences between the origins, as discussed above, there were too many common threads and parallels. It was hard to ignore the signals and still the world ignored ouches to ignore them. And that  confirms to what Bishop Desmond Tutu or Jeremy Grantham said. Remember the golden words of Sir John Templeton, “The four most dangerous words in investing are: ‘this time it’s different.'”

Ignore the history at your peril. Learn the lessons and remember those. If required, re-read the book.

#RidingTheRollerCoaster – 173

Buy high sell low … or is there another way of making money?

Success in the stock market is based on the principle of buying low and selling high. Granted, one can make money by reversing the order – selling high and then buying low.” – Said Sir John Templeton.

Sir John, a bargain hunter as he was, found a bargain in the internet stocks – well, the bargain was not in buying, but in selling. However, since he did not own any stocks, he had to short-sell the stock by borrowing the same from the market and later reverse his trade, i.e. buy back the stock.

Sir John Templeton took out the list of DotCom (or Internet) companies that raised money through IPOs and then further filtered on when the lock-in period was getting over. He started short-selling the shares a few days ahead of expiry of the lock-in period anticipating large amount of stock being off-loaded once the lock-in was over. He was right on target and in a falling market reaped huge profits.

What did the other great investors do in that time? Read it in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

@RidingTheRollerCoaster –  164