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




Spot the difference – Tulip bulbs and IPO of Reliance Power

In 17th century Amsterdam, there was a mad rush about buying and selling tulip bulbs. Speculators were scrambling over one another to profit from this rare opportunity of making money.

A tulip bulb becomes a good investment only after it is being put in the ground and then the plant bears beautiful flowers. However, the speculators had no intention of putting the bulbs under the ground.

Centuries later, we saw a similar mad rush in India when a record number of demat accounts were opened only for the purpose of buying the shares of a company in its IPO – the company was Reliance Power Ltd. It was a greenfield venture of the Reliance Anil Ambani group that was setting up mega power plants. However, while the power plants were to set up after a few years (the project’s gestation period was more than 4 to 5 years), those rushing to buy the shares in the IPO had no intention to see the plants being erected. They simply wanted to sell the shares immediately on listing at a profit – speculation of the highest order.

In both the cases, the participants were under a false notion that they were investors, whereas their action of nothing but pure speculation on the price movement of the instrument. They were looking for a “greater fool” to help them make money.

Instruments change, time changes, people change, geography changes – man would remain constant factor in all manias.

#RidingTheRollerCoaster – 162