Prime Membership

Financial manias, or market bubbles, have been a regular part of economic history. From the Dutch Tulip craze in the 1600s to more recent events like the dot-com bubble and the 2008 financial crisis, these patterns keep repeating. Despite past lessons, people still fall for these moments of market madness.

By studying these past bubbles, we can spot common patterns. This helps us understand why they’re hard to stop and how we can better protect ourselves from their worst effects.

I recently briefly explained to a friend how these manias work and how people typically behave during them. You can read that here.

However, exclusive to Mastermind members, I have created this three-part detailed series to dive deeper into how financial manias operate, why they keep happening, and share some ideas on how to deal with them. Understanding the mental, social, and economic factors behind these events can help us resist their appeal and make smarter investment choices.

Read the first part on the anatomy of a financial mania.

Here is the second part on the inevitable fall, and the most important lessons you can draw from it.

Financial manias, or market bubbles, have been a regular part of economic history. From the Dutch Tulip craze in the 1600s to more recent events like the dot-com bubble and the 2008 financial crisis, these patterns keep repeating. Despite past lessons, people still fall for these moments of market madness.

By studying these past bubbles, we can spot common patterns. This helps us understand why they’re hard to stop and how we can better protect ourselves from their worst effects.

I recently briefly explained to a friend how these manias work and how people typically behave during them. You can read that here.

However, exclusive to Mastermind members, I have created this three-part detailed series to dive deeper into how financial manias operate, why they keep happening, and share some ideas on how to deal with them. Understanding the mental, social, and economic factors behind these events can help us resist their appeal and make smarter investment choices.

Let’s begin the series with this first part on how a financial mania typically unfolds, and the most important lessons you can draw from it.

I have started this new series – Five Good Lessons – for Mastermind members, wherein I will be sharing five good lessons from a book on investing, money, behavioural finance, learning, and life, and my perspectives on the same.

The second book I write about today is Nassim Taleb’s Fooled By Randomness.

First published in 2001, this book continues to challenge our understanding of probability, risk, and success in both financial markets and life. Let’s explore five crucial lessons from this thought-provoking work, examining their relevance in today’s context.

I am starting this new series – Five Good Lessons – exclusively for Mastermind members, wherein I will be sharing five good lessons from a book on investing, money, behavioural finance, learning, and life.

The first book I start with is Benjamin Graham’s The Intelligent Investor, one of the very few books in investing that have stood the test of time.

First published in 1949 and revised several times since, this seminal work continues to shape the philosophy of value investing and influence investors worldwide.

Let’s delve into the five good lessons from this financial classic, examining their relevance in today’s market context.

As an investor, analyst, or business owner, it is very important to understand how to value companies across different sectors. I have created this detailed guide to help you with exactly that – explore various relative valuation methods, and their applicability to different industries.

I have also added a few practical examples from the Indian market to explain the concepts better. Here, please note that the financial numbers or stock market data I have used are just for calculation purposes and are approximations around the current values (as on 28th August 2024). Also, none of the stocks listed below are recommendations.

Anyway, let’s start right away.

In the world of investing, risk is an ever-present companion. We spend countless hours analyzing data, studying market trends, and crafting meticulous strategies to mitigate known risks. Yet, as the legendary investor and co-founder of Oaktree Capital, Howard Marks, once famously stated –

Risk is what’s left over after you think you’ve thought of everything.

This sentiment is a stark reminder that in the unpredictable world of investing, there are always unknown and unexpected risks lurking in the shadows.

Today, I share with two compelling stories told by Marks and another noted investor Joel Greenblatt, to shed light on the importance of acknowledging the existence of these hidden dangers and surprises, especially when you are sure that no such surprises exist.

Growing up in the 90s, and before digital cameras became common, one of my most precious possessions was a Kodak roll camera.

It was a simple box camera that came loaded with a 36-exposure roll of film (if I remember that correctly). When the roll was finished, the camera or the roll was handed to a photo studio for processing.

My friend’s father had a photo studio that was one of the best in town and where I got my photos developed. The studio contained a dark room (called ‘darkroom’) that no one was allowed to enter, which was typical of any photo studio those days.

When it comes to thinking and decision making, Derek Sivers is one contemporary philosopher I look up to.

In 1998, Sivers was making a comfortable living as a full-time musician. He wanted to sell his music CDs online, but there was no way for a small time musician to sell online, so Sivers took matters into his hands and built a website to sell his CDs. Very soon his friends started requesting him to list their CDs on the website. That’s how CD Baby was born. Ten years later when he sold the company, it was doing $100 million in revenues. Sivers gave away the proceeds from the sale ($22 million) to a charitable trust.

Man, they say is a social animal. Leave him alone on an Island, and he will not last long even if he has the amenities needed for survival. I am not sure if any social scientist has ever done such an experiment, but it is highly unlikely that many people can survive in an isolated environment. Maybe that is the reason Hollywood makes so many movies on this theme.

In fact, one of my favourites is one such movie titled ‘Cast Away.’ This film depicts a FedEx employee stranded on an uninhabited island after his plane crashes in the South Pacific and his attempts to survive on the island using remnants of his plane’s cargo.

The puzzles underlying the fine-grained matrix of human behaviour is unfathomable. As you dig deeper, new surprises are waiting for you. I have been a student of behavioural economics for almost a decade but every time I think of myself as an old hand on the subject, I am reminded of my folly.

Cognitive errors are not like other errors which are usually a result of misplaced knowledge. Knowledge doesn’t cure a psychological bias. A cognitive bias is a systematic error in how we think, as opposed to a random error or one that’s merely caused by our ignorance.