Quote for the Week

Every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever…

They speculate with it in bubble companies and in worthless shares, just as they did in the time of the South Sea mania, when there were no banks, and as they would again in England supposing that banks ceased to exist. The mania of 1825 and the mania of 1866 were striking examples of this; the delirium of ancient gambling co-operated with the milder madness of modern overtrading. At the very beginning of adversity, the counters in the gambling mania, the shares in the companies created to feed the mania, are discovered to be worthless; down they all go, and with them much of credit.

The good times too of high price almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while, and long before discovery the worst and most adroit deceivers are geographically or legally beyond the reach of punishment. — Walter Bagehot (source)

Quote for the Week

While the internet boom lasted, nothing seemed able to deflate the bubble. Few internet and dotcom companies were profitable, but investors never seemed to mind. They looked at the number of customers or subscribers as the basis for valuing internet stocks. The name of the game became raising capital, not making profits. Even when fashionable stocks dipped, there was remarkably little effect on the rest of the market. People had learned that it pays to buy the dips and were not weaned from the habit until it ceased to pay…

Despite its irrational aspects, the internet boom was more than a matter of inflated valuations. The optimism of the financial markets not only changed the “fundamentals” of individual businesses, it had real and profound effects throughout the whole economy. The boom did not only follow from the development of the internet; it accelerated that development and contributed to the speed and extension of technological innovation. The same was true in telecommunications, where the boom also accelerated the spread of new technology. — George Soros (source)

The earliest known book describing any stock exchange was written in 1688. Aptly titled, Confusion of Confusions, Joseph de la Vega describes stock and options trading (mostly of Dutch East India Company stock) on the Amsterdam stock market through a conversation between Shareholder, Merchant, and Philosopher.

The book is a defining example of how little markets have changed in over three centuries. From the early reference to the game and its primary players to the scheming and manipulation to the influential emotions of greed, fear, and panic, the lessons are old, yet still relevant today.

It starts with a fitting description of stock markets:

Quote for the Week

The pendulum of investment psychology is constantly fluctuating between optimism and pessimism, between greed and fear, between credulousness and skepticism, between risk tolerance and risk aversion. It will always swing, and it is the presence of optimism, greed, credulousness, and risk tolerance that makes markets most dangerous…

One of the first lessons I heard about pendulums and the swing of investor behavior regarded something I was taught in the early 1970s: the three stages of a bull market. These succinctly capture the essence of investor psychology.

The first stage comes when a few people begin to realize that there will be improvement. The second stage occurs when most people realize that improvement is already taking place. The third stage comes when everyone thinks that things will be getting better forever. Clearly, the first is early; the last is laughably late. One of my favorite adages – perhaps my favorite of all – is that what the wise man does in the beginning, the fool does in the end. So it’s the buyer in the third stage – who buys when optimism is incorporated, under the assumption that things will always get better – who pays the price. — Howard Marks (source)