Mobs, Messiahs, and Markets

Don't Be a Patsy

There are investment markets, and there are markets of investments.

In the markets of investments, buyers and sellers apply their individual judgments to the value of an investment, and the market price is established.

In the investment markets, on the other hand, both buyers and sellers read the papers in order to try to figure out what “the market” is doing. That is to say, an investor leaves behind the things he knows and understands for things he knows very little about and will never understand. The neighborhood bank stock is dumped like an old girlfriend; the man is ready for big‐time action on Wall Street. He listens to Jim Cramer and forgets to smirk. He looks for the consensus view on next year's earnings and the likely direction of the market in the months ahead. He is no longer an intelligent, independent investor, but a mass market speculator.

Actually, calling him a speculator is pure flattery. A real speculator has a realistic view of the odds and almost always operates on a simple premise—that the crowd usually underestimates the odds of discontinuity.

Take the case of the market that goes up every year for 10 straight years. What are the odds that it will go up again? There is no way to know. But mankind is a credulous beast. If he smites his firstborn and it rains the next day, he will be smiting his firstborn every time there is a drought for centuries to come. And if the market has gone up for 10 years straight, a kind of sentimental momentum ...