Tuesday, March 18, 2008

It Does Fluctuate, doesn't it?

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one”.
Charles Mackay, author of “Extraordinary Popular Delusions and the Madness of Crowds”

Bombay Addict makes some excellent points here. Since he’s asked nicely, as to what the markets have taught us from the recent mayhem, here’s my take on the same:

1) Re-read “The Money Game” by Adam Smith - If you haven’t read it, read it. If you have read it, re-read it. “If you don’t know who you are, then this is a very expensive place to find out”. Just this glittering nugget of wisdom is worth the price of the book. The market is not what you think it is – it does not know you, and has nothing to do with your hopes, ideas, dreams and fears.

2) As a thumb rule, when the paan-wala starts giving you stock tips it’s time to get out. I’m sure most lay folk, on the Indian bourses, managed to beat Bill Miller last year in total return generated, but there is a reason why Miller is still CEO of a multi-billion dollar investment house while your aunt is trying to hide her losses from your uncle which she incurred by following tips from her kitty party friend who got it from her hairdresser who is knows the vada-pav seller on the street where Rakesh Jhunjhunwala’s office is located.

3) It never is different. The reasons for all indiscriminate great bull runs are different, but they end with the same results – big, dumb banks going bust, other assorted corporate/broking house scandals and YOU left holding the bag and trying to convince your family that the kids can make do without food for a few days every now and then.

4) Life is shaped by Black Swans. A Black Swan, as defined by Nassim Taleb who has written a very well received book called just that, is an event that is an outlier, has huge impact and is explained, ex post facto, as predictable. Put simply – rationalizations, of hugely unexpected events, on hindsight are the first refuge of the Clueless. If you think you know where the market is headed, then you don’t know where it’s headed.

It’s easy to sound knowledgeable and cool when one isn’t at the receiving end of a broker statement awash in red. Perhaps that’s the biggest lesson – be as acutely self-aware when one has a seven figure amount invested in the market as when one has zero amount of money invested in it.

2 Comments:

Blogger Bombay Addict said...

Dude, ain't this the truth. Funny how all of it is forgotten when the bulls are running away. Keep the posts coming bro, always good to read it!

March 19, 2008 at 8:08 AM  
Blogger Shankar Nath said...

Hi,

Hopefully, you have read the classic by Charles Mackay. Dont miss the portions on the South Sea Bubble and the Tulipomania.

Warm Regards
Shankar
http://scrip-tures.blogspot.com

April 19, 2008 at 1:37 AM  

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