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What A Tulip Can Tell You About Sensex Reaching (Or Not Reaching) 100,000

This post has been authored by Dev Ashish of Stable Investor.

You must be wondering whether what you just read in the title of this post is correct or not? Isn’t it?

You are being told that a flower can tell you whether Sensex can reach 100,000 or not? Now this is really strange.

Not Warren Buffett. Not Charlie Munger. But a flower?

Well, a flower can help you in answering the question whether the Sensex will reach 1 Lac or not. But mind you, this figure of 1 lac is not a figure of imagination which I have pulled out of a magician’s hat. This is a number which has the blessings of many so-called market experts.

But for the time being, let’s park the discussion of whether Sensex will reach that target or not.

Let’s get back to the story of Tulip.

The story dates back to 1630s. Holland (or Netherlands) had become independent sometime back and people were looking for symbols to use as a mark of their freedom. And one of the symbols which caught attention of the people was Tulip. Now, Tulips do not grow very quickly. So there was a sustained increase in demand, which could not be met by the supply which was increasing at a much slower pace.

Result?

More and more transactions were being settled by using Tulip as currency. And since traders were easily able to find people willing to pay more for a bulb of Tulip, the speculators became 100% certain that tulips can never go down in prices. (Can you now draw similarities between the last statement and what is the general perception associated with real estate prices in India?)

The faith on value of tulips was so much that traders created the very first futures market for Tulips. They would simply trade commitments (Promises) rather than Tulips. And people were ready to buy these on the assumption that someone would be ready to pay more for the promise (future contract) tomorrow.

But a day came when the buyer did not come to purchase the contract. And that was it! The prices of Tulips started falling.

They fell from a high price where someone could exchange one Tulip for a big house, to the bottom where it was worth less than the price of an onion.


So what does this story of a flower tell us?

The most important thing this points to is the concept of Herding. It is the idea that people are more comfortable investing their money in the same way as the majority of others at any given time. Even if the majority of those (herd) are doing something really irrational.

I mean, how can you ever think of trading a piece of real estate for a single flower?

This also tells that crowd has a brain of its own and can do anything. It does not matter whether it is rational or not.

Now let’s come back from the 1600s to 2014.

So what is happening these days?

We have a new government. And the government is decisive and a very positive change considering the last 10 years.

And what are market experts doing? They are using this positive feeling and optimism surrounding the new government to come up with vivid, eye-catching numbers.

40,000…..75,000….100,000…it does not matter.

If one thinks objectively, the realization will occur that India is a very big country and change cannot happen overnight. There are so many dependencies that one negative trigger and entire over-optimism would be thrown out of the window. Recent Iraq crisis, which is still brewing hot, can have a really negative impact on the economy. And experts are downplaying the threat right now.

One man cannot decouple the entire county from the world economy. Period.

But markets have taken a breather in just last few days. And according to experts, it will continue the upward journey towards Mt. One Lac quite soon.

So since we all are poised to become very rich because markets will continue going higher and higher… why am I telling you all about Tulips?

It’s because the madness of the crowd has still not reached levels touched during Tulip mania. And to be honest, it might never reach those heights.

I am assuming that in present day, nobody will trade their house for a piece of flower. 🙂

When the madness and irrationality will rise, I am sure that you will not be ready to listen to me. Isn’t it? When markets start going up, and your portfolio makes you feel like a Superman every day of the week, chances are that if you come across someone who is talking about risks associated with rising markets, you will not be interested in listening to him.

So my suggestion to you is that you should bookmark this page for future reference. If markets continue to rise for some time, and you start feeling that stock markets are the easiest way of making money, then please re-read this post. You will be thankful to me when markets eventually do start coming down in future.

About Dev: Dev Ashish is an engineer and MBA and is currently working with a private bank. Prior to it, he worked in a Fortune 500 organization in oil refining sector of India. Dev is also a founder of a site dedicated to long term investing – Stable Investor. His hobbies include travelling, photography, wealth management & blogging.



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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. Nelson Christian says:

    A timely reminder indeed. Few sane voices like you and Vishal do help us a great deal by showing us the right way.

  2. Vishal, You have to bookmark all your posts!

    Social Proof : Every one is investing.

    Hindsight Bias: Price has gone up and up.

    Anchoring

    Feedback Loop

    But can a water heater be stable with positive feedback loop?

    Contrast effect: We keep seeing the price every day. We don’t feel how much it has gone up since last 8 years.

  3. Prashant Khorana says:

    I rarely engage in dialogue with newsletter writers, but I just have to point out that the Tulipmania is one of the most incorrectly used cases in history to teach ‘market irrationality’. There are hundreds of research papers written every year, debunking the myth of the bubble (Try this).

    The Tulip price crash happened because of a wave of other events at the time…all explainable in due course; but Charles Mackay’s theory is constantly brought everywhere regardless.

    Let’s just say – your due diligence fell short here.

    Cheers.

    • Hi Prashant

      It took me a while to go through the document and am glad I did.  And I thank you for pointing out the issue as it seems that like me, many people are under the assumption that Tulip mania is only because of market irrationality and irrational exuberance.

      But having said that, message of the post still remains the same. It is better to know about market irrationalities now than being a part of it later and losing both one’s money and sleep.

  4. Amit Kinhikar says:

    Thanks Vishal !

    Indeed a good reminder for our financial behavior.

  5. Vikas Dhanuka says:

    We should be ready to see Modi Mania for Indian Stock Markets.

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