The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Your Own Private Stock Market

Larry Summers, a former U.S. Treasury secretary and past president of Harvard University, believes technology misleads investors. “It is like when you build better highways,” he says, “people tend to drive faster. And actually more people end up dying in auto accidents on these new highways because they make a mistake in estimating how fast they can drive, and they end up driving much faster than they should.”15

Couple technology with low interest rates, which historically precede major financial crises because almost anyone can borrow money, and you have the recipe to create “market morons.” Leon Cooperman, one of Wall Street’s elder statesmen, and chairman of hedge fund Omega Advisors, knows just what happens to market morons. Cooperman says:

In the last five years the guy who normally takes his savings and buys Treasury bills to make sure he never lost any income has gone out and bought the bonds instead. And the guy who would normally buy bonds, because he was ready to take a little more risk to get a little more return, has gone out and bought emerging-market bonds from places like Russia or Brazil, and the guy who would normally buy emerging-market bonds is now out buying emerging-market stocks. What has to happen—and it will happen—is that some people who have moved up this risk ladder will lose a lot of their money and they will move back.16

If recent history is a reliable guide, the move back to safer parts of the risk ladder is temporary. ...