Investing and the Herd 
Sunday, January 27, 2008, 01:15 AM
Posted by Mohan Venigalla
It is highly likely that the recent turmoil in the stock markets around the world would be impacting you personally. I have been into stock market investing in the US since 1991. I have taken my share of hits and hits (beatings and wins.) I read a lot and learned a thing or two about investing. I would like to share some of the things I learned here as a several part series. Take it for what its worth – which is to say, caveat emptor.

Part 1 – Anecdotal Evidence and Investing

You know the most powerful of all emotions in the investing world? If you thought it is “fear” you are correct. The fear of losing more potential gains drives the markets higher. The fear of losing money drives the markets lower. The stronger the fear the faster the speed with which the markets move in either direction.

Most technical analysts claim to predict market tops and bottoms based on some charts and other statistics. May be they can. But you don’t need to be a technical wizard to notice these. At the height of the market everybody who wanted to be in the market will be in. In other words, there is not many new players in the markets to push things higher. When things turn, it takes a while for those who are already in the market to figure out. How would you know if the market has peaked? Here are some anecdotal observations to be on the look out for:

1. Investment discussion dominate your social parties. Everybody and his/her spouse are talking about the money they already made and how much more they are going to make with their current holdings. If somebody who is invested has a long term track record to support their claims, pay attention to what he/she is saying. But if the boasting comes from a not-so-experienced person, or worse, form a stupid person (in your opinion, of course) – get out of the market. If you delay, and want to sell on a day like January 15 and 16 2008 when markets around the world tanked, you broker would be asking you, “sell to whom.”

2. When the cover of Time Magazine (or its equivalent) features a big winner who benefitted from the recent upswing or downswing in the market, that would be the time to take the opposite position. Here are some of the recent anecdotes that would have given you ample warning. Mukhesh Ambani becoming the world’s richest due to the stock market surge in India made a big news in India. Was he the front-page story in India Today? I honestly don’t know if he was or not. But if he was, this would be a big cue for you to dump all your shares. About two weeks ago The Wall Street Journal featured a front page article on a guy who benefitted the most by placing the bets that housing market would slump. In one year he made about 12 billion (3 billion to himself) on these bets. He is still bearish.

3. There are more, but that would be an information overload for you. :)

When I saw the above mentioned WSJ article, I told one of my colleagues, I think the bottom for this market is very near. Right now, I am willing to go out on the limb and say January 16th would be a short-term bottom (say, 12 months) in the world markets. Since the market bottom of 2001 (post 9/11 attacks) the easy money has already been made – especially in India. However, market gains here after would not come as easy they were in 2004 to early 2007. That’s my take. Again, take it for what its worth and don't place your bets based on my prediction(s).


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