The madness of crowds can be clearly seen in investment markets.
Greed run amok has been a feature of every spectacular boom in history. Investors (or perhaps we should call them speculators or gamblers in this case) are desperate to gain a piece of the action and in doing so lose sight of the need for an investment to have a firm foundation of worth - an intrinsic value.
Once upon a time telephone cards were becoming profitable. I had telephone card dealers tell me of the ease with which they were generating profits of 50% or more. And good luck to them - but I must wonder what the underlying intrinsic or real worth of a phone card is. Not too different from an investment number plate probably.
A year or two prior there were very few people trading telephone cards. Publicity saw the numbers swell and also the availability of new card issues.
The profit motive was presumably the encouragement for many, not the aesthetic beauty of the cards.
Those who recognised the potential and got in early may have done well. Those coming in as friends and workmates discussed double digit returns may have done less well (or may have been burned).
Gustave Le Bon noted in 1895 (somewhat unkindly I thought) that “in crowds it is stupidity and not mother-wit that is accumulated”.
While his emphasis was on psychology rather than investment, history has shown the truth of his words in investment markets.
Burton Malkiel put it quite well when he said “skyrocketing markets that depend on purely psychic support have invariably succumbed to the financial law of gravitation.”
There will be periods where investment prices will be based on castles in the air, the firm foundation of value having been left well behind.
An awareness of the excesses of investment history can better equip an investor to deal with investment issues here and now.
In the meantime, it's a long time since I've seen telephone cards traded!
