Nov

17

In describing a Hitler oration Shirer in Berlin Diary: "in the sound of the magic words of Hitler, they were merged completely in the German herd." Rosenbaum in his introduction to Rise and Fall of the Third Reich: "was it a unique one-time phenomenon or do humans possess ever present receptivity to the appeal of primal herd like hatred". Galton in his Inquiries into Human Faculties likens the human tendency to gregariousness to the oxen he tried to train to lead without success. We see evidence of this herd like gregariousness all the time in markets, and the only problem is to ascertain the end of its irrationality so as to profit from it.

Anonymous writes:

A CEO told me over the weekend that now that his business is "hot" he has been told the Japanese company that kicked the tires and decided not to buy much lower might now buy at 1.5X to 2X the current price as popularity has created the needed validation for the purchase. Wonder if that matches your observations.

Victor Niederhoffer writes:

Sounds like the gregarious imitative Japanese persona. Do you agree?

Larry Williams writes:

I agree, but disagree. The buying is not based on any unique Japanese Persona, rather most all people buy high and most all people are afraid to buy when prices are falling. Human nature. High prices prove it. Only real speculators look past today for proof.

anonymous writes:

Larry and Vic,

The anecdote and your responses illustrate both of your biases, which are not necessarily any better or worse than the Japanese buyer's bias.

Example 1:

If the company is an early-stage drug company with billions of potential long-term profits, but dependent on Stage 2/3 clinical trial results, it may be demonstrated mathematically that buying the company after it achieves positive results (and after the price has increased 2x) is a better risk-adjusted return for an acquirer who doesn't like portfolio volatility.

Example 2:

If the company is entering a new space and is a first-mover, there are numerous examples where buying the company after it has critical mass is a better bet than speculating on a long shot. Goldman Sachs is a primary example of a company that rarely enters a market early.

I heard a truism on the radio last week: "People love to go shopping when things are on sale. The only exception is the stock market where lower prices scare the buyer." This is both a true and false statement. If a sweater gets marked down 20%, it's the same sweater. However, if an individual stock price goes down 20%, it may OR may not have the same earnings potential prior to the price change. There is a difference between "price" and "value". Great investors understand this difference and even they sometimes get it wrong.

So, while I am not defending the Japanese fellow, generalizations without numbers on the table are no better than snide racial epithets.


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