Some paragraphs from a classic (1979):
The Common Characteristics of the Manias
The most surprising thing about speculation is its remarkable similarity from period to period. Similarity in the conditions necessary to breed the manias, in the abandonment of prudent principles, and in the infatuation with concepts. Most important, there is a tremendous similarity in the attitudes of the market participants. In each case--tulipmania in seventeenth century Holland, the South Sea Bubble in eighteenth century England, the "new era" market of the twenties, and the go-go years of 1967-1970--the bulk of people in the market were intoxicated with the idea of wealth and the ease with which it could be procured. The image was so simple. One merely had to own a tulip bulb or land in Florida or a computer leasing company share to build a fortune. There is even a remarkable similarity in owning exciting "concept" companies in 1720, 1929, 1962, and 1967-1968. Each mania created its own social reality far removed from past standards of value. Caution was tossed aside by many, and justifications were made about why things were really different "this time."
In each market excessively risky actions were justified as prudent, and those who did not go along were pushed aside. A young gunslinger at the height of the go-go euphoria of 1967-1968 was interviewed on TV and discussed his aggressive investment "strategies." When the name of Benjamin Graham, whose measured approach emphasizing full evaluation of risks and conservative pricing formulas, came up, the money manager said "the trouble with old Ben is that he just does not understand this market."
He was right. Benjamin Graham could not, for it violated all his investment standards. Shortly it came crashing down, carrying most of the go-go crowd with it.
In every era, once the crowd begins to realize the excesses of the boom, there is a scramble to escape, resulting in panic which most often carried values far below the point from which the manias began. Perhaps the most curious fact of all is that the sharp percentage drops from each highwater mark were so similar--on the order of 90%.
Our history lesson, then, has shown us that speculative bubbles are not simply relegated to the realm of the past . . .
--David Dreman, Psychology and the Stock Market 94-95 |
