Here We Go Again

I thought things would cool off for a while after the devastating drop following the 1983 bubble. I was wrong. No matter how much we study the subject, we are shocked anew at the power of the image in markets. Even Mackay and Le Bon would have gasped to see how quickly the crowd, after absorbing gut-wrenching setbacks, came back to follow near-identical images. At this writing, as described above, we are in the largest IPO frenzy on record one that dwarfs 1983's in size and lunacy. In 1983,...

The World of Social Reality

The vision of desperate investors scurrying about in a collapsing market trying to save themselves from their own foolhardiness may be amusing, but are there lessons for today's market History shows that group madness is not necessarily short-lived. The fear of the flooding of the Thames lasted many months the real estate bubble was in full bloom for four or five years the burning of witches went on for centuries. In each of these cases, the image created its own reality, reshaping the...

Info

A all the evils the investor must face, the devil of risk is perhaps the most treacherous. At this point it's time to step back and ask a basic question are the risk measures you use effective Or could they actually impede good investment decisions We saw in the last chapter how a new form of risk sprang full born at the investor after the Second World War the risk of loss of purchasing power though inflation and taxes. This risk is far more severe than financial risk, because it is universal....

Surefire Way to Lose Money

At this point, you might wonder if I'm exaggerating the problems of de-cision-making and forecasting in the stock market. The answer, I think, can be found by considering the favorite investments of market professionals over time. Consider a large international conference of institutional investors held at the New York Hilton in February 1970. The 2,000 delegates were polled for the stock that would show outstanding appreciation that year. The favorite was National Student Marketing the...

Bad News for the Handicappers

Average changes in confidence and accuracy with increasing amounts of information Source Adapted from Paul Slovic, Behavioral Problems Adhering to a Decision Policy,'' IGRF speech, May, 1973. winners. As Figure 4-2 shows, their confidence rose directly with the amount of information, but the number of winners, alas, did not.41 As the above studies demonstrate, people in situations of uncertainty are generally overconfident based on the information available to them, believing they are right...

Stock Returns Over Time

When I wrote Contrarian Investment Strategy in 1980, stocks were more out of favor than they had been in 15 years. As we saw in chapter 11, collectibles, diamonds, precious metals, and bonds burnt up the track in the previous eight years, while stocks lagged badly. If you had asked investors back then for the last place they wanted to put new money for their retirement, most would have said common stocks. If these investors had had this chapter in front of them at the time, I think many of them...