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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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

Thinking in a bull market and a bear market …

If you attend investor meetings in various market cycles, you realise that there is a pattern in the questions. In a typical bear market, the questions tend to focus on challenges and risks, whereas in a bull market, the focus shifts to opportunities.

See the following post and the article on which it was based:

Unicorns, cockroaches and investment decisions

A good story is seen with suspicion in a bear market under the influence of fear and doubt, whereas questions are set aside when greed takes over – a typical bull market.

It is important to understand that in all market citations, there are opportunities and challenges. However, neither can be controlled by individual investors or advisors. We can at best take advantage of these. Or we can protect ourselves from the negative impacts of these.

That is possible only if we focus on what is in our control and what is not.

Read the “Serenity Prayer” (Page 199 of the book) and the subsequent discussion.

#RidingTheRollerCoaster – 126

 

 

Tomorrow never comes …

There are many small stories in the epic Mahabharata. In one such story, a beggar comes to the Pandavas asking for some help. They are in the midst of a discussion, and Yudhisthira, the elder brother, asks the person to come the next day. Hearing this, his younger sibling, Bheema reminds Yudhisthira of the audacity of assuming that he would be alive tomorrow. This story highlights the importance of understanding uncertainty associated with the future.

However, we have always wanted to know the future.

Often, the experts get swayed by the same emotions and get their forecasts wrong.

To read more “On Forecasting and Expertise”, see the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

#RidingTheRollerCoaster – 106

Rise and fall are inevitable

Rises and falls in market prices are inevitable. They are part of the nature of the open markets, wherein a large number of people can come and transact, based on their perceptions and opinions.

#RidingTheRollerCoaster – 71

Man and mania

Tulipomania, Ulipomania or IPOmania – “man” is the common denominator in all “manias”

 

#RidingTheRollerCoaster – 28

Why markets go bust …

The market can go bust for no apparent reason except that it had run up to irrationally high levels. Ditto for the reverse

#RidingTheRollerCoaster – 25