In his book – Devil Take The Hindmost, Edward Chancellor discusses the excessive swings in markets that never change. Here’s an excerpt from the book:
As the stock market itself is, like Hobbes’s Leviathan, composed of the actions of individual speculators, these neurotic traits can be found in the mass psychology of bull and bear markets. During the bull or manic phase, activity is frenetic and expectations become unrealistic.
On the other hand, when the mood of the market is depressed, activity—measured by stock market turnover—is lethargic, and universal pessimism replaces unrealistic optimism. According to Benjamin Graham, the author of The Intelligent Investor, “Mr. Market lets his enthusiasms or his fears run away with him.”
Graham s disciple, the investor Warren Buffett, elaborates this description of Mr. Market’s instability: “At times he feels euphoric and can see only the favorable factors affecting the business… At other times he is depressed and can see nothing but trouble ahead for both the business and the world.”
The tendency of the market to produce excessive swings can be ignored for investment purposes, as Graham and Buffett advise; or it can form the basis for speculation, as was the successful practice of the nineteenth-century economist David Ricardo, who “made money by observing that people in general exaggerated the importance of events.
If, therefore, dealing as he dealt in stocks, there was reason for a small advance, he bought, because he was certain the unreasonable advance would enable him to realise; so when stocks were falling, he sold in the conviction that alarm and panic would produce a decline not warranted by circumstances.”
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