Once in a decade or less our stock market - in fact any stock market - is straddled by a strange madness. Any increase in the share prices gets the media to scream about the last debacle in our case the crash of 1996. Any rise in the price of shares is pointed out by experts of all colours to be a sure sign that eventually the force of gravity would result in the inevitable fall in the prices. The often repeat concern is that the poor and foolish investors will burn their fingers.
Mr. Tony Jackson of the Financial Times recently put his point of view and market wisdom in the prospective. He says, "What we have here is the Greater Fool Theory. This says that even though you are perfectly aware a thing is overvalued ... you keep buying it anyway. Why? Because the thing is still going up. When the time comes, you will find a Greater Fool to take it off your hands. Until, of course, the music stops, and the Greater Fool turns out to be you."
The problem with this point of view is that it contradicts in the first instance the accepted principle of fundamental approach of the economists. Or for that matter the subsidiary school of thought that gives credence to behavioral economics and therefore accepts the fact that often people make irrational decision.
In fact even with fundamental base in evaluating stock there is a tendency to over estimate. In the best of times one can be hyper in matters of new technology. After all one is talking of multiples in the matter of future growth. If one uses hindsight and goes back to the listing of Microsoft the question has been not the asset value of the company but what it may earn in the future. Your estimate in terms of my estimate may vary significantly to the degree that the higher estimate would be classed as an imaginary figment of an irrational mind. Then Microsoft did prove the point that such earnings are possible eventually leading to the dotcom hype in the early 2000.
The survey of my friend the unknown stockbroker is that most small investors follow the leader. They are particularly sure that this is hype and there is this belief that they shall get out with pocket full of money before the market actually is affected by the gravity. He believes there is no such thing as a foolish or an ignorant investor. This investor is the audience to the great Greek tragedies, weeping and crying by the plight and distress brought on the hero or the heroine, which he can share as an obtuse audience without being the actual affected party.
But smart investors think differently. They have their own information generally unrelated to the actual affairs of the concerned company. Certain milestones or events that they feel will activate the market. One could call this a private research in either micro or macro structure of the market. Once such people move in, the market reacts because there are many other who do not use their head but merely follow others because this is the next best thing to insider trading. He buys a large volume, which leads to rise in prices and becomes a signal that other investors agree it's a good stock. He would follow the herd, which is a perfectly rational approach. Herds are considered a safe haven because the belief is that so many people cannot be wrong. Alternatively if none follows him, stock will crash, and the crash will be rational.
But all these premises go down the drain because of the mindset of the regulatory body. Because the concern is not to allow the bubble to grow whereas other stable markets let the bubble burst on its own strength. Thus the regulator intervenes in the natural demand supply structure thereby giving some investors an added advantage because of their inconstant decisions. The stock market trading engine is heavily burdened with circuit breakers, filter which does not permit investors to be overtly edger in their buy orders or discount their sale order beyond certain limits. The most recent innovation is against what is known as aggressive orders.
Our regulatory friends forget that in a free market, our being a highly controlled, a person cannot get ahead without being aggressive. Please look around and find for yourself that companies that are successful are the companies, which are aggressive in their marketing. Professor Walter Ferrier of University of Kentucky in his milestone research concludes that companies..."are more likely to experience market share erosion and/or dethronement when relative to industry challengers-they are less competitively aggressive, carry out simpler repertoires of action, and carry out completive actions more slowly."
In the view of Charles Manger, great fund manager, the attitude of the regulator is that of the man with a hammer. Whenever he sees a nail, he hammers away, because that is what he is trained to do. Today the nail is the so-called bubble. As soon as a bubble is perceived he hammers it down to infinity. But such hammering tends to have bad side effects like all good medicine. Something goes wrong somewhere else. If one has to hammer than hammer happily across the board otherwise you would not know what will creep out of the woodworks. After all the stock market is not a rations shop.
