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

Samudra manthan – Excessive turbulence

Think of all market turbulence as “Samudra manthan”. In the mythological story of samurai manthan, so many things came out, including poison and nectar. The market turbulence is no different. Every market turbulence brings out some poison and some nectar.

The poison kills many investors’ portfolios and reputations of some experts. On the other hand, we have seen in some episodes how the turbulence brought out the best. Some examples of the nectar are:

  • Birth of Securities Exchange Commission, Federal Deposit Insurance Corporation and Federal Reserve bank after the great depression
  • Beautiful tulip gardens of Amsterdam
  • Birth of SEBI, NSDL, NSE after the great Indian securities scam. Innovations like screen based trading, dematerialisation of securities, rolling settlement, etc.
  • Birth of companies like Amazon, Google, etc. in the DotCom boom

Such churning of the ocean is required to bring out the nectar.

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

How fortunes changed

During the Tulipomania in Holland

Those who believed that there couldn’t be such a thing as poverty in Holland found themselves holding tulips that nobody else was ready to buy. Suddenly, like in many more such episodes to follow, the once rich found themselves poor.

#RidingTheRollerCoaster – 110

Man and mania

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


#RidingTheRollerCoaster – 28

“… what a read/ride it was …” says Mr. Sudarshan Rao

I just finished Riding the Roller Coaster and boy, what a read/ride it was. Painstakingly handpicked stories from the Tulips to the Ulips. I will keep Riding the Roller Coaster !

  • Sudarshan Rao