Last week, I happened to meet a fund manager who was setting up his own shop in one of the most expensive properties at CBD in Mumbai. Well, his office rental became a point of conversation, which is where it came to light that he wanted to stay close to his investing tribe, hence the choice of place.
Perhaps, the fund manager had not read “The Crowd” by Gustave Le Bon – fantastic book which talks about how an individual’s conscious activity gets substituted by the unconscious action of crowd.
In the investing world, there is a commonality of purpose – each of the investing participants wants to make money. The crowd, popularly known as “market” becomes an important consideration to reflect upon while investing.
The Market has certain general characteristics (as provided in the book):
# Mental unity: Participants in the Market puts them in possession of a sort of Collective Mind which makes them feel, think, and act in a manner quite different from that in which each one of them would feel, think, and act were they would, in a state of isolation.
From the intellectual point of view, an abyss may exist between a great mathematician and his boot maker, but from the point of view of character, the difference is most often slight or non-existent.
No wonder, Einstein and Newton – both considered as geniuses, lost their individual rationality, thereby losing lot of money in front of Market’s collective wisdom.
# Impulsive & Mobile: Market is at the mercy of all external exciting causes and reflects their incessant variations. It is the slave of the impulses which it receives and is inadvertently mobile.
The very fact that that we have continuous feed of news and each anchor trying to rationalize the movement of the Market basis some random external variable factor indicates the impulsiveness and mobility of the Market.
“Everything that was good for the market yesterday is no good for it today”
# Exaggeration and Ingenuousness: Whether the market is bullish or bearish, it leads to exaggeration of the sentiments of the market participants. This exaggeration of sentiments leads itself very quickly by a process of suggestion and contagion, considerably increasing its force.
Also, with majority of the market participants being naïve, this unsuspecting character leads to a story bubble of stocks, thereby creating extreme oscillations of greed and fear.
Recent exaggeration of AI and Electric Vehicles leading to the death of traditional automobiles combined with increased cost of insurance, compliance to the new BS VI regulations has resulted in significant fear in the Market – Death of Automobiles is near, thereby significant derating of auto stocks!! How far is it true? How long would it take? What would be the impact? Would all vehicles turn electric by 2030, considering none of the OEMs have any either any significant capex on batteries or have they announced any tie-up with the battery makers. On the other hand, Market has rewarded some of the EV makers with handsome price appreciation, despite being unprofitable as compared to other traditional OEM players.
# Emotionality: Market is more rational than emotional. That’s precisely the reason market participants say “Bhaav (‘Market’) Bhagwaan Che” – “Price (Market) is God” But this is not always true!! Sometimes, the market turns more emotional than rational. This is where, value investors take contrarian bets. It is waiting in the side-lines for the right pitch to arrive and then go for the homerun, in baseball parlance.
When market turns emotional (sometimes), it is then, the prepared mind can take a sizeable position and reap in the rewards. Hence, an independent investor needs to understand the emotionality of the market along with his; this is when money gets made.
Benjamin Graham, father of value investing, succinctly coined market as Mr. Market, and the fact that it is there to serve you, more of it at http://jaagrav.com/index.php/2018/10/07/market-mayheminvesting-framework/
Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.