How intelligent do you have to be to invest on the stock exchange?
You have to really know what you’re doing, right?
You can’t just throw darts at a list of companies on the wall.
You wouldn’t let a chimpanzee pick out your stocks and shares.
Or would you?
How about if a chimpanzee threw darts at a list of companies?
Well in 1999, a chimpanzee throwing darts at a list of companies was the 22nd most successful investor on Wall Street.
The six year old chimpanzee beat six thousand mutual funds, showing a 213% gain.
It doubled the performance of the Dow Jones.
It quadrupled the performance of the Nasdaq.
Roland Perry, editor of Internet Stock Review, set up MonkeyDex.
The chimpanzee would throw darts at a list of 133 internet companies and, over the year, those investments showed returns of 365%.
So that leaves a question: why doesn’t everyone invest that way?
The answer is, it was the time of the dotcom boom.
From 1990 to 1997, internet penetration of US households went from 15% to 35%.
Suddenly any company with ‘.com’ after its name was gold dust.
The investors’ mantra was “Growth over profit”.
Day traders were in the grip of ‘buy low, sell high’ mania.
But then, like all bubbles, it burst.
In 2000, the Nasdaq peaked, but two years later it was down by 78%.
Between March 2000 and October 2002 the market lost 5 trillion dollars.
52% of those dotcoms were out of business by 2004.
But the lesson isn’t about the market, it’s about people.
In a bull market, when everything is going up, any idiot can make money.
Even a chimpanzee throwing darts at a list stuck on the wall.
Like any bubble, it’s just everyone jumping on the bandwagon.
But a bull market doesn’t last forever.
It’s followed by a bear market, when everything goes down.
When everyone is desperate to jump off the bandwagon before they lose everything.
The phenomenom that causes bubbles is called FOMO: Fear Of Missing Out.
This is the result of an entire news industry built on reporting news.
Free newspapers twice a day, a dozen 24-hour TV news channels, hundreds of news websites, news radio stations.
Their product is news, and they need a constant supply.
So, if there isn’t any news, they have to create some news.
Whatever the latest whacky fad is, it has to be treated like real news.
And gullible people, reading or watching, will believe it is real news.
Which is how all the latest trivial fads get blown out of all proportion.
This is exactly what happens in advertising and marketing.
FOMO.
Of course, we have to be aware of innovations, but not to the exclusion of common sense.
We have to learn to think for ourselves and use our brains, instead of following the herd.
The current FOMO fad is crypto currencies: Initial Coin Offerings.
According to Tokendata (the ICO tracker) 46% of ICOs launched last year have already failed, and another 13% are in the process of failing.
That’s $223 million flushed down the drain because of FOMO.
Which is why my favourite quote about investing is from Warren Buffet.
He said: “A market downturn is like the tide going out: it’s easy to see who isn’t wearing swimming trunks.”
Dave, don’t forget the “Greater Fool” theory.
The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price.
From greater fools bubbles are born.
Absolutely George, absolutely –
“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”
I remember reading a book called How to Invest by Sarah Greene. In the opening papragraph she mentions; Firstly make sure you have a roof over your head, secondly, that your mortgage is paid, or covered by your job, thirdly, that you have a pension. Then, and only then, if you have some disposable income that you are happy to throw away, think about investing on the stock market. Personally, I just call it gambling. In Russia they have a saying: “He who takes no risks will not drink Champagne.” That’s fine by me. I’ll stick to the tapwater.