As humans, we believe we act rationally. Indeed, most of the time we do. But all of us know of a situation where a person overreacts to something, gets agitated for something minor or celebrates something prematurely.
Crowds and Dopamine
Remember the last time you were in the pub watching the game with your mates? (Yea, perhaps not due to the ongoing pandemic.. I know). When your team was getting reaaaaally close to scoring, the noise in the room goes up and we get excited. This is your brain releasing dopamine. Hands get raised to cover mouths, and a cacophony of disappointment fills the air when the player misses the shot. And you revert your attention to the foamy thirst-quenching pint in front of you.
We get excited in crowds, and we get disappointed in crowds. We all know the above scenery and its easily explained. Now ask yourself: “How does this behavior reflect in markets?” The answer is, a LOT!
They Come in Many Colors
The oh-so pleasant flower, the Tulip originates from Central Asia and Turkey. During the Dutch Golden Age in the 1600’s, every Frieslander and their mama went into a tulip frenzy. Now known as the “Tulip Mania”, it is one of the earliest recorded speculative bubbles. The prices of these flowers reached astronomical and unsustainable levels, which ultimately collapsed.
In investing, even if it smells great and looks good, make sure it actually produces something of value.
Roses Are Red, Violets are Blue. Open the Factory, or I’ll Leave You!
From whiffs of pleasant floras, we move to circuits on wheels.
The South African mad lad Elon Musk is tech savvy and internet-lingo literate. On Twitter he sometimes posts snarky, mischievous remarks, and the correct-opinion-having comedian/media industrial complex doesn’t quite know how to handle him.
On the one hand, he’s part of the solution to climate change with his lovely electric cars with unpatented technology for the good of humanity. But on the other hand, he doesn’t behave the way we want someone so “progressive” to do.
Recently he Tweet-threatened to move Tesla’s HQ from California to Texas if he’s not allowed to open his factory. He also stated that he would do it regardless of the lockdowns and asked himself to be arrested instead of his employees. It seems that Alameda County officials caved, scared by the potential loss of tax dollars. If it’s okay for Tesla, why is not okay for small business owners? Just some food for thought on the “integrity” of politicians.
Tesla’s stock has been behaving erratically during the recent months. Not too long ago, Musk tweeted that he thinks the stock price is too high, sending its price down.
It seems to me that Mr. Market has absolutely no idea how he should price the company.
Conclusion
Reading too much market news can be detrimental to your financial health. The truth is that nobody knows the extent to which Corona will effect the world. Understand that Mr. Market does not know how to price stocks in this completely new paradigm. This is the reason for the erratic volatility we’ve been seeing. Thus when it comes to certain “experts”, refer to what I wrote about shamans.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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