About Stocks, Flowers and Pigs
The question is: What can we learn from it, apart that you shouldn't buy stocks from an additional mortgage on your house?
Buying and selling stocks have some specific and some common characteristics compared to other markets.
Like all markets, if there are no buyers, prices go down.
Like all markets, too much supply lowers the price, oversupply let prices crash.
As a student I worked a couple of weeks at the largest flower trade center of the world (a building of 7.5 million square ft). Every morning flowers were brought in and auctioned. If there were more flowers than buyers and minimum prices were not met, the oversupply was destroyed. During the morning I had to distribute roses, tulips and other beautiful flowers between the buyers. In the afternoon, some of us had to destroy part of the supply. The growers had figured out that long term it was better to establish a minimum price guarantee, than to let drop prices of all flowers to close to zero if there was to much of it. The minimum prices were paid for through a common fund, a type of assurance.
vba.nl
No such guarantee in the stockmarket. As there shouldn't be one neither.
Another example of crashing prices is the market for pigs. Pigs need a year to grow. If there is a lack of supply prices are high and growers make a lot of money. Supply cannot be increased on short term, so prices remain stable at a high level. Other farmers watch this and decide to enter this business. They take a loan and start to produce pigs as well. One year later the market is overflown by pigs and prices drop well under their cost. Farmers with debt lose their house or pension. This cycle happens all the time. Question is, why does it repeat itself if all farmers know this? It is an example of the game theory. If you see that prices are high, you will remember that sometime ago there was a slump in prices because of overproduction and you may decide to keep out of this business. But if you see some months later that some farmers are really getting rich, you may change your mind and just give it a try. This pattern is followed collectively by many farmers. And so again, the market is flooded with pigs.
The Nasdaq going only higher and higher during 1999 will have attracted many new investors and increased the holdings of existing investors. People knew the risks, but it was difficult to stay out.
The falling prices are a result of collective behavior more based on psychological than technical analysis. Stocks go down, people get fear and don't buy anymore.
What did I learn now? The techstock market as a whole was very high priced. I had no doubt at all about my gnet stock. But it had been better to put some in cash one or two months ago and step in again with the nasday 20 or 30% lower. The wise foxes will step in coming days and pick up the bargains.
Next time I'm the fox.
Regards
Pareto |
