Join our investing community

Yeah Right!

Discussion in 'Shares' started by Tropo, 5th Nov, 2006.

  1. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,396
    Location:
    NSW
    Yeah Right!

    Recently I was sent a copy of a newsletter that talked in depth about the current property boom in WA. I don't really have an interest in property, and I have even less interest in property in WA, however one thing in the article tweaked my interest. I saw the famous phrase that has heralded the signal to sell in every boom ever experienced. The magic phrase that is guaranteed to summon forth the demons of a over inflated market running on nothing but hope and hot air is . "this time it's different!"

    The last time I heard this phrase was in February 2001. Back then analysts tried to explain to the rest of us, in a fit of galactic optimism, that a business run by two pimply faced kids out of their parents garage that was going to bring high speed, wireless broadband digital widgets to people in Africa, who didn't have a phone let alone a PC, really was valued at $5 trillion. They tried to tell us that this was only the beginning of a brave new age in markets...yeah right.

    People in the middle of booms have uttered this phrase since the beginning of time. What people who are new to markets fail to realize is that markets have been around since we have had civilization and that the people who make up markets have not changed at all in that time.

    As a bit of history lesson consider the following little timeline of busts.

    333 BC Athens Greece

    This is the world's earliest recorded bubble and as you would imagine
    involved property. With all the pioneering things the Greeks did
    this bust set the tone for all those to come. Asset prices rapidly
    deflated, scapegoats were sought and it was reasoned that it should
    never happen again. The good news for those who were still holding their pieces of dirt as prices headed down the gurgler was that if they held on for long enough they would get their money back. The only problem was that it wasn't until the next millennium that prices returned to their pre-bust levels. Still those fundamentalists do have a point - if you hold onto something for long enough it will come back in value.

    1637 Holland

    Holland presents an interesting study in how to snatch defeat from the
    jaws of victory. As the 17th century unfolded Holland had become a major trading power. Popular accounts indicate that at the height of the boom 40 tulip bulbs (yes, flowers) would sell for as much as 100,000 florins on a dedicated tulip futures exchange. To put this into context the average yearly wage at the time was 150 florins and a ton of butter cost 100 florins.

    As you would expect this all ended in tears in February 1637 as the market collapsed.

    1715 Mississippi Bubble

    In the early 18th century, the French economy was in somewhat of a state having virtually bankrupted itself due to appalling economic management and a bad habit of losing wars to the English. Enter Scotsman John Law who quickly established a scheme to stabilize the French economy using France's vast holding in Louisiana. Law set about selling shares in France's land holdings in the New World via the Banque Generale. The desire of the French for shares in the New World was staggering with shares beginning their lives at 500 livres and by 1719 had hit 10,000 livre. Like all good booms this one also ended ignominiously for all those involved.

    The collapse of the Mississippi Company plunged France and Europe into a severe economic depression, laying the groundwork for the upcoming French Revolution. For a time, France reverted to a barter style economy.

    John Law was viewed as a scam-artist and was exiled from France. Law returned to his gambling roots and died in poverty.

    1866 London

    We tend to think of technology as being a modern invention with crashes spreading like a global pandemic carried across the world at the speed of light by our modern communications network. However, this somewhat limited view is not true.

    When the London discount house Overend Gurney collapsed on Black Friday (May 1866), the new technology of the ticker-tape introduced a new element into crashes that had not been seen before. Traditionally crashes had been somewhat localised affairs that took a considerable period of time to permeate outside their exact epicenter. However the ticker tape powered by new undersea cables made certain that markets wobbled globally within minutes.

    Without wishing to sound too sanctimonious I can guarantee you that at the height of each of these booms there was someone standing on a street corner presenting reasons as to why this time it was different. At the time these reasons would have all sounded well reasoned and well presented. Yet when you think about it how can it be any different - markets are simply the aggregation of the irrational desires of vast
    hordes of punters. Behavioural finance long ago showed that the cornerstone of the Efficient Market Hypothesis, that humans behave rationally, was flawed. If this is so and the evidence to accept that it is so is compelling, then how can anytime be different. Granted, the instruments at the centre of booms and busts have undergone some evolution and the technology that facilitates these booms has improved dramatically. However, at the centre of the boom is still the same average punter who has not changed be they betting on the South Sea bubble or some internet company that is all vapour.

    So when you hear the phrase "this time it's different", it may be time to say to yourself - "yeah right".

    - Chris Tate