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3 Bubbles and Crowd

November 21, 2008

Men go mad in crowds and come back to their senses slowly and one by one

History holds with itself many instances of riches made and riches gone, and invariably an ever increasing crowd to fuel it. Scientific studies have shown any sane, rational man lose his sense of judgment when the people around him[crowd] intentionally/unintentionally answer wrongly.

This puts forth a perspective which few of us, have thought about. Crowd rarely makes money. Period.

Only they make money who have ridden a bubble and bailed themselves out when everybody is in a scramble to enter. Yes, you might be excluded from the most exciting, fascinating and satisfying stage of a bubble market, the final nail in the coffin where the collective crowd pushes the price further up. But inevitably the painful ride to down will be avoided. Here are some of the most famous speculative bubble

  1. TulipMania :
    Can a mere bulb of tulip cost $76,000 ? Yes, it can if you were part of the crowd which drove the tulip frenzy in Holland during 1634. Perhaps the first tulip which came to Holland was, thanks to Conrad Guestner[and thats the man you should shoot!]. He brought a few bulbs of tulip from Turkey  around 1594. Something new, exotic and enchanting, soon drove the creme de la creme to see it as a symbol of affluence. And when the higher classes follow, middle class try to emulate. And thus started the famous tulip bulb craze. People left their jobs, sold their farms, animals and literally everything to buy one[Oh!-God,-please-give-me-only-one] tulip bulb.To put things in perspective, the prices rose more than 20 times in one month. So, people joined in a droves and scores. Umm… and when everybody joins in, the party ends. So, did tulip craze end, when everybody started producing it thus starting a slight downtrend. A few speculators, intelligent money and smart money bailed out at this first instance. Driving the prices further down. And then the faucet opened. Driving everyone to their ground first and then their senses.
  2. South Sea Investment Bubble:
    During 1710, a company floated by two London stockbrokers proposed to Robert Harley government, that the outstanding public debt of 9.47ml pounds be converted into equity for the trading and exploration company called South Sea Company. Due to a series of developments, South Sea had been ordered to pay the debt to English government. Which it did by floating new issues and raising its share prices. The year was 1720. Month January. During the course of next seven months, share prices of South Sea appreciated from 120pounds [on 100 pounds par value] to around 950 pounds. If exuberance was long, but retribution was swift and brutal. During the next two months, it lost all its value and some more. The price on 1st October 1720 was 290 pounds.
  3. Stock Market Crash of 1929:
    After World War I the United States experienced an economic boom based on new technologies in products, production processes and firm management (e.g. General Motors and Ford in automobiles, RCA in electrical appliances). The boom was facilitated by the increased use of installment credit. In 1927 a short recession ended and industrial production jumped 25% until 1929. The stock market continued to defy gravity, crowd continued to pour in and fuel the rise. In the years to come, stock markets showed an appreciation of an average 140% yearly. Soon the markets crashed from 381 in September 1929[1926 considered 100] . On subsequent months, Dow fell more than 62% and in the summer of 1932 reached its bottom of 34[ -91%]

Quite a heady mix of manias, but the question is have we grown any wiser? So its evident, crowd doesnt remember history, neither it knows technicals. It gives into the quicksand of greed, fear, anxiety, emotions and exuberance. Control them, and you are one up on the crowd! Give into them, get ready to be trampled when the crowd runs in panic. And the best way, is not to push yourself closer to market but away from it, so that you still maintain a perspective of the technicals and not enough leash to emotions to run haywire.Observe yourself when you drench in fear, celebrate in exuberation and if you still have some logic left in you exit the trade.

Here are some more bubbles, no smaller in magnitude or devastating in consequences, only to remind you that history will repeat itself, take the lessons now!

  • Stock Market Crash of 1987
  • Asian Market Crash of 1990s
  • Stock Market Crash of 2000
  • SubPrime Crisis of 2007 😉
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