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The Cocktail Party Stock Market Indicator

Apart from Graham’s The Intelligent Investor, there is no better book to get started for beginners in the stock market than Peter Lynch’s One Up On Wall Street.

The real beauty of this book is the easy-going review of the simplistic stock picking style that brought Lynch so much success in his profession as a fund manager at the US mutual fund company, Fidelity.

This book is low on number crunching but high on anecdotal stories. Moreover, readers are given a clear picture on how to get off to a good start in the markets.

Using humour, Lynch helps you discover that he is a normal guy who thinks rationally, believes in doing his own independent research on companies, asks plenty of questions, and gets caught off guard by the market at times, just like anyone else.

Anyone thinking about buying individual stocks must read this book before they ever make their first stock purchase.

Anyways, as I was re-reading the book, here is something I came across that can be termed Peter Lynch’s Cocktail Party Stock Market Indicator.

Why an indicator? Read this excerpt from One Up On Wall Street and you would know why…

If the professional economists can’t predict economies and professional forecasters can’t predict markets, then what chance does the amateur investor have?

You know the answer already, which brings me to my own ‘cocktail party’ theory of market forecasting, developed over the years of standing in the middle of living rooms, near punch bowls, listing to what the nearest ten people said about stocks.

In the first stage of an upward market – one that has been down awhile and that nobody expects to rise again – people aren’t talking about stocks. In fact, if they lumber up to ask me what I do for a living, and I answer, ‘I manage an equity mutual fund,’ they nod politely and wander away.

If they don’t wander away, then they quickly change the subject to the Celtics game, the upcoming elections, or the weather. Soon they are talking to a nearby dentist about plaque. When ten people would rather talk to a dentist about plaque than to the manager of an equity mutual fund about stocks, it’s likely the market is about to turn up.

In stage two, after I’ve confessed what I do for a living, the new acquaintances linger a bit longer – perhaps long enough to tell me how risky the stock market is – before they move over to talk to the dentist. The cocktail party talk is still more about plaque than about stocks. The market is up 15 percent from stage one, but few are paying attention.

In stage three, with the market up 30 percent from stage one, a crowd of interested parties ignores the dentist and circles around me all evening. A succession of enthusiastic individuals takes me aside to ask what stocks they should buy. Even the dentist is asking me what stocks he should buy. Everybody at the party has put money into one issue or another, and they’re all discussing what’s happened.

In stage four, once again they’re crowded around me – but this time it’s to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they’ve all gone up. When the neighbors tell me what to buy, and then I wish I had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble.

This cocktail party theory shows the irony and approach that most investors take. As I can experience in my socializing these days (though I do very little of it), I find a lot of individuals interested in discussing the appreciation in stock prices than plaque or the fights they had with their bosses.

So my guess is that we may be at stage three currently.

Anyways, I don’t go to cocktail parties. But if you are going to one soon, please let the tribe know the indications you get on where the stock market is headed next. 🙂

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Prashant Hazariwala says:

    Dear Vishal,
    You r suggesting a real good books about investing and behaviour of investor. I would like to ask you about any good book written by indian investor and author about indian stock markets its cycle and behaviour. As we have passed through this cycles and can be very easy to understand it and our mistakes during this cycle.

    Thanks

    Prashant

  2. R K Chandrashekar says:

    Hi Vishal
    The cocktail theory reminds me of how the legendary Joseph Kennedy(father of JFK) responded in a similar situation. While getting his shoes shined, Kennedy’s shoeshine boy started giving him advice on what stocks to buy. At that very moment Kennedy claims he had an epiphany, realizing that it must be time to sell. After tipping the bootblack, Kennedy reportedly hurried away and sold all of his stock holdings just in time to avoid the carnage of the 1929 stock market crash.

    While i am no great party animal, the few i attend is in HR and IT industry and its only when i am in a family function that i am on my guard-knowing that i am the grand daddy of stock market investment !!! Having learnt and still learning from all the mistakes and experiences from 1978. A wonderful journey

  3. Reni George says:

    Dear Vishal

    Good afternoon to you

    On of the Initial books that i read was one up on wall street… a lucid writing which after reading would remove the fear from you heart about Investing and equity markets and would make you fall in live with equity investments.

    As someone as said,…”In the equity market…a person with a knowledge in psychology is sure going to have an upper hand than the person who is good at number crunching”and what better thing to validate this than the words of Peter Lynch and his theory of cocktail party stock indicator.

    I remember a Incident in the fag end of 2007.somewhere near to September 2007 ,A guy whom I had seen trading from some six to seven months back…come up to me and was talking to my broker friend,who name was manish…”Arre manish bhai ..aap kya recommend karte ho…..mere recommendation pe kaam karo, dekho aap aur aapke client kis tarah kaamte hai”.That day evening over a tea..I told my broker friend..”yaar I think I should move away some of the money that I have invested in the market and which is giving me good returns”He was perplexed and was astonished …He told me wait the market is going up you will make some more …I told him “you see yesterday a guy came to you with his recommendation and when people with short stay in the equities come and give recommendations its high time you move out and anyways…..I need the money as I have pay the tuition fees and hostel fees for my brother who has joined a MBA course…”So I liquidated 90% of my holding and just kept stocks worth 80 thousand in my portfolio.After that I saw the market going up further and really felt foolish…but somewhere some sixth sense was telling me something bad was going to happen.

    And this guy who came up with the recommendations laughed at me and judged me as a coward and told me that equities is not a place for you you should go to Bank FDs.The market kept going up and I proceeded for my Christmas holidays…and then I came back by jan 15th 2008…by that time the market had made a new high..it started coming down due to the credit bubble and on jan 21st when I visited my broker friend ..I could see this guy perspiring it was mid afternoon and a chilly day…by afternoon the market had crashed and by the end of the day though the sensex recovered by some 700 800 points..it still fell by 1400 points.The margin money of most of the investors was wiped of…I knew the brokers would start dumping the shares in the morning the next day if investors were not able to replenish their margins.and the next day it was a free fall.This guy that day lost 2000000Lacs rupees and over all he lost also his relatives wealth to the tune of some 70 to 80 lacs.

    Circa, move to April 2014. that guy was never to bee seen again,heard that he had to sell of his house to pay the creditors ,well I iam still alive in the markets by gods grace.But we have not reached the euphoric level this time around…because i still visit lot of brokerage house to gauge the mood of the retail investors…..the market are making new highs because right now due to the new high fixation the retails are shorting the market and the market is going high…soon they will be forced to change their trend….

    But yaa if we take the cocktail party theory into action we have surely reached the level three…because i received calls from some traders from whom i have had not heard for a long time asking me if i had some stocks for a quick growth..

    So the fourth stage is not far away….normally this stage is the most toughest stage.Need to keep you ears and eyes plugged.The day when people around start asking you…so dear how much you made today in the markets.Remember that is the day you sell out and go to your native village and do some farming or take your kindle and start reading some books.

    Thanks and Regards
    Reni George

  4. Wayne Gonsalves says:

    Couldn’t agree with you more Reni.. yesterday i got a call from someone asking me if i traded in the stock market 😛 The last time i got a call like that was in 2010 i think My best guess is we are probably some where between two and three.. One up on wall street changed the way i researched stocks .. it made it more fun 🙂

  5. Nelson Christian says:

    I too was instantly thinking of the shoeshine boys story that I had read quite some time back. This too is quite a good tool to judge whether the market has peaked going by the Euphoria/hype prevalent amongst retail investors.

  6. The current rally from what I hear and sense is mostly due to FII’s pumping in money.
    Another leg up and retail (or whoever) may start wondering what they have missed and therefore start putting money which sure is possibly the peak of the rally.
    My belief is while history rhymes (if not repeat) there could be some divergences from trends.
    Every time retail may not be the sacrificial goat but somebody will be ! That is the nature of the beast.
    My checks with people on the ground indicates no tangible change except sentiment (or rather talk/ media reports) and I wonder what magic wand is there with anyone.
    But surely, if intent is good (better governance, kick starting the economy etc), ways can be found and plans executed which would benefit all.

  7. hello all,
    Even i think we jst have breached the level 2 n slowly venturing into the level 3.
    But its far far away from level 4, as retail participation is at its lowest. the day we see retail turning to mrkts (which might happen on modi win) , we shall b close to level 4 & thts the best time to start relaxing..

    Thanks.
    Jugal.

  8. I read this book about 6-7 years ago along with Peter Lynch’s other book Beating the Street. Back then I had no investing strategy or philosophy. I was one of those who started ‘investing’ because everybody was talking about stocks. I exited the market completely post the 2008 crash because of other financial commitments and haven’t gone back in since.

    Following your post, I went back and started reading my copy of One up on Wall Street again this week and found how much sense it made. Some of my investments pre-2008 were unkwowingly made in the Peter Lynch model – ICICI Bank because I used to bank with them, HDFC because I used to have a home loan with them, Infosys – I worked in IT . They all made decent money and then there was the Reliance Power IPO..

    Reading the book it struck me how that even though it was written a couple of decade ago how true Peter Lynch’s words are. I have seen a company grow for the last 6 years and had the opportunity buy the stock at any time in the last 6 years and I would have made a killing. There are so many such opportunities around us in our every day lives.

    Hopefully, this time around with knowledge gained from people like Vishal and the rest of the Safal Niveshak tribesmen and women, I wont make as many mistakes or buy stocks in hope and pray:-)

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