According to André Kostolany,
stock markets are like a man walking with his dog. They both follow
the same path, but, while the man is walking slowly, his dog is
jumping around back and forth. Sometimes man is ahead; he will wait
for the dog and in other occasions when the dog is ahead and the dog
will wait. The man represents the economy, and the dog stock markets.
https://www.youtube.com/watch?v=GomcMKBIjMA
(In German though).
Question is why this happens. How come that wisest experts in biggest investment banks do
not agree them all if stocks will go up or down by just studying
numbers.., even most often, when most agree, they are wrong..
In a previous post we
showed an example of investment based in company public/published
data, as, normally, any fundamental investor would do, but, what if
those data are not totally true, or if there is most updated
information, internal problems, new legal regulations, etc..., that
is not known yet...
All these uncertainties
may be reasons for the dog to go forth and back, but, as humans,
there is an even most important reason human psychology. And this,
actually, has not changed in last 8000 years...
In stock market bubbles,
human nature comes in and mucks up elegant economic theories.
So, it is important to be
aware when a bubble ongoing, to avoid get trapped, and, if you are
smart enough, to make money out of it.
Stock market bubbles are
as old as stock markets. Probably there were bubbles in ancient Egypt
based on wheat price, or on real state in Rome, but one of the first
documented ones was the Tulip mania, where prices of a single tulip bulb was higher than the price of a
mansion in Holland.
Some years later, we
can find the South Sea Bubble, where South Sea Company shares went up
next to £ 1000, to drop under £ 70 in few
weeks.
Even people as smart
as Isaac Newton lost lot of money in this bubble..
We could ennumerate
many others, but just as example, lets mention a just a few more, the
pre 1929 stocks bubble:
The known dot com
bubble, year 2000..
The following real
state building, pushed but low interest rates and subprime mortgages,
to recover from previous bubble...
The post 2008 crisis gold bubble, (many people won't agree on calling this bubble yet, denial phase, see below).
And just a few
months ago, Bitcoin bubble, last closing price, Friday July 26th was $94.72, http://bitcoinprices.com
So, have you noticed
the pattern, yes, all of them look alike.., just now things happen
faster and faster..., and main impulse to bubble is human psychology, here we see the known phases in every bubble...:
In fact, using some
common sense and making numbers, bubbles
can be avoided, even they can be used to get some profit out of them but, be aware, it
is not as simple as it seems, people as smart as Newton were caught
by crowd psychology, and it is hard to listen to your neighbour saying
he is making money in (dot com, gold, real state, tulips, etc..) and
you are not...
Which is next, shale gas, 3D printing, self driven cars, China real state, student loans in USA, art, wood.., don't get trapped, if something had a bubble before, history always repeats.
Which is next, shale gas, 3D printing, self driven cars, China real state, student loans in USA, art, wood.., don't get trapped, if something had a bubble before, history always repeats.
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