Fooling All of the People Some of the Time - 1
“You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time.” - Abraham Lincoln
Now, what has the above to do anything with investing? Actually, a lot - with market psychology, about how greed and fear drive the forces of financial markets. The "alpha" (excess over normal market returns) is made by intelligent investors because all of the people get fooled some of the time.
It has been rightly said that men think in herds, go mad in herds and only recover their senses slowly, one by one.
One occasion in history when an entire nation deluded itself was the infamous "Tulipomania". In the late 1500s and early 1600s, the unpretentious and innocent-looking tulips took an entire country for a ride. They were eagerly sought after by the wealthy folks in Holland and Germany. People became intensely passionate about the tulips. Prices were exorbitant and common sense was left to the winds. This mania reached its zenith in 1634 - all classes of society vied to possess tulips and displayed unbridled enthusisam in the "tulip trade".
In 1636, the Stock Exchange of Amsterdam established the sale of tulips in Rotterdam, Harlaem, Leyden, Alkmar and other towns. This new speculation encouraged gambling - traders speculated in the rise and fall of the tulip stocks. "Everybody grew rich, initially". And everybody expected that the passion and demand for tulips would rise forever". Houses, lands, horses,.... were sold at ludicrously low prices. And the government stepped in to increase the governance - notaries, clerks and exchanges were arranged.
And suddenly, prices began to fall and panic descended. There were sellers, with tulips but no buyers. Most people lost their fortune beyond redemption. The government, which was called in to rescue the situation, refused to be drawn in. Some sort of a "compromise" was drawn out, which satisfied no party. Tulips, once priced at 6000 florins were now available for 500 florins, a 91% loss. Does this remind you of the free fall of pricey stocks during the 2000 dot com bust? No court in Holland agreed to take up the complaints, as all these were gambling transactions. Overall, it was a shock for the people and the country.
Now, for the comments of the Master (Warren Buffett) on such situations, "A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons".
I have been to Amsterdam in 2011 and found it one of the best cities that I have visited. That it was one of the centres of commerce as early as 1400 impressed me no end. I also made a trip to the famed Keukenhof Gardens. See photo attached.
Those who watched the 2011 Hollywood movie "Wall Street 2: Money Never Sleeps" would have seen the painting of Tulipomania in Michael Douglas' office.
And finally, this adds one more book to my reading list, Tulipomania (by Mike Dash).
Invictus.
Now, what has the above to do anything with investing? Actually, a lot - with market psychology, about how greed and fear drive the forces of financial markets. The "alpha" (excess over normal market returns) is made by intelligent investors because all of the people get fooled some of the time.
It has been rightly said that men think in herds, go mad in herds and only recover their senses slowly, one by one.
One occasion in history when an entire nation deluded itself was the infamous "Tulipomania". In the late 1500s and early 1600s, the unpretentious and innocent-looking tulips took an entire country for a ride. They were eagerly sought after by the wealthy folks in Holland and Germany. People became intensely passionate about the tulips. Prices were exorbitant and common sense was left to the winds. This mania reached its zenith in 1634 - all classes of society vied to possess tulips and displayed unbridled enthusisam in the "tulip trade".
In 1636, the Stock Exchange of Amsterdam established the sale of tulips in Rotterdam, Harlaem, Leyden, Alkmar and other towns. This new speculation encouraged gambling - traders speculated in the rise and fall of the tulip stocks. "Everybody grew rich, initially". And everybody expected that the passion and demand for tulips would rise forever". Houses, lands, horses,.... were sold at ludicrously low prices. And the government stepped in to increase the governance - notaries, clerks and exchanges were arranged.
And suddenly, prices began to fall and panic descended. There were sellers, with tulips but no buyers. Most people lost their fortune beyond redemption. The government, which was called in to rescue the situation, refused to be drawn in. Some sort of a "compromise" was drawn out, which satisfied no party. Tulips, once priced at 6000 florins were now available for 500 florins, a 91% loss. Does this remind you of the free fall of pricey stocks during the 2000 dot com bust? No court in Holland agreed to take up the complaints, as all these were gambling transactions. Overall, it was a shock for the people and the country.
Now, for the comments of the Master (Warren Buffett) on such situations, "A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons".
I have been to Amsterdam in 2011 and found it one of the best cities that I have visited. That it was one of the centres of commerce as early as 1400 impressed me no end. I also made a trip to the famed Keukenhof Gardens. See photo attached.
And finally, this adds one more book to my reading list, Tulipomania (by Mike Dash).
Invictus.
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