Irrational Exuberance

Once in a while, the stock market goes into bubble mode, or what the guru terms as irrational exuberance. In Singapore, this phenomenon probably exhibits in one of the following ways:

1) The STI chart looks like the left half the Eiffel Tower in Paris

2) Two or more friends are switching career into finance

3) Local TV did a drama/talk show/charity program on stock trading

4) A taxi driver recommends a stock to you

5) You actually think if you should buy the stock he recommended

6) This blog gets prime time coverage on Channel U

7) Your grandma wants to open a brokerage account

8) The market cap of a sexy stock is bigger than the GDP of some countries in S.E. Asia

You get the idea. For those of us born before 2000, we've been there, done that and some are still licking our wounds but secretly wishing that those days will come around again, and this time we will do it right. Right?

Well let's see what really happened. In the World of Wall StreetCraft, probably around 1995, some cleric created a portal and invited some friends to join him. But the catch was that the friends had to pay a small sum of money to buy their entrance ticket. They did.

For a while, the group of friends were feeling good. The portal offered warmth, companionship and a lot of promise. It linked to different places in the world and new technologies were created. Soon more people joined, and for everyone that joined, people in the portal enjoyed some income.

As more and more people joined, the portal started to get crowded, boundaries were pushed out to acommodate more people and entrance ticket got expensive. Some left the portal but more people joined. Entrance ticket got ridiculously expensive but a lot of other folks did not want to be left out and paid up.

By now the portal looked very roundish, yes like a bubble, and full of people inside quashed around but getting very euphoric. This was because the value of their entrance tickets is worth more than what they could have earned in 20 lifetimes. They felt like gods and goddesses in heaven eating grapes and stuff. This was when grandmas in Singapore heard about the portal and wanted to join as well.

Now the grandmas in Singapore were the last people to join the portal and suddenly everyone realized that no more income can be gained since everyone was already in. This was when they realized the portal was getting stuffy as well and everyone wanted out.

Overnight as everyone rushed out, entrance tickets became worthless and a lot of grandmas and clerics who bought the tickets late lost their shirts. In fact they lost everything they had, some moved on, but some remained in fantasy, constantly hallucinating about the good days where they were eating grapes and stuff in heaven.

Actually not everyone joined the portal. A group of obsured people known as value investors watched the whole portal episode by the sidelines. Cajoled to join but they knew better. They knew what was irrational exuberance. In the end, they were the ones who picked up the pieces, drank the wine and had the last laugh.

See also Pyramid or Ponzi Scheme and Positive Feedback Loop

and Expectations vs Reality