by Jeff Thomas, International Man:
When I was a boy, cartoonist Charles Schulz introduced a new comic strip called Peanuts. Its central premise was children having the same problems as adults, and it was an instant hit.
There were several recurring themes and, each autumn, the cartoonist would have his main character, Charlie Brown, attempt to fly a kite. At first all would go well, and Charlie Brown would build up his hopes, only to have them dashed when a tree would snag his kite and eat it.
This theme was endlessly enjoyable, as it reflected a syndrome familiar to all adults. The cartoonist was careful to ensure that he could do new variations on the theme every autumn, due to the fact that Charlie Brown never succeeded. At the end of the strip, the tree always ate his kite.
And so it often goes in the adult world. Albert Einstein famously said, “The definition of insanity is doing the same thing over and over and expecting different results.”
And, yet, in every era, we can see this strange behaviour play itself out, time and again.
People go to casinos, imagining that, somehow, the casino will lose and they will win. They buy lottery tickets with odds of hundreds of thousands to one against them.
And, amazingly, they invest in the stock market, not just badly, but in the very same pattern that has historically proven to virtually guarantee loss. More amazingly, this is not the behaviour of the occasional loser; it’s the approach adopted by the great majority of investors and is one that they staunchly defend as “wise and informed investing,” right until the crash that cleans them out.
So what, then, is this pattern? Well, generally, a potential investor contacts his broker and asks him if there’s anything he can recommend. The broker virtually always says yes—that whilst some stocks do not earn his endorsement, there are others that he feels are almost certain to go up.
Should the investor then buy, he can count on the broker to push the prospect of further investment, whenever one of his recommendations has risen in value. (He’s less likely to get in touch if his recommendations go down.)
As each bull market unfolds, the broker advises his clients that, if they don’t continue to buy, they’ll be “missing out,” and the opportunity for enrichment will pass them by.
Each investor who’s roped in by this spiel reinforces the broker’s prediction, expanding the bull market and attracting more and more investors to get into the game.
Then, something very interesting happens.
In a major bull market, when investors have reached their limit, they’re advised that they can buy on margin and increase their position. This is acknowledged as being risky in normal times, but these are not normal times. This is the mother of all bull markets, and “the sky’s the limit.” The investors dive in.
When they become so strapped that they cannot buy on margin any further, many investors, believing that they’re on the cusp of getting rich, borrow money privately to buy on margin and, in so doing, become dramatically leveraged, but they do so because the broker promises that the bull market is going “to the moon.”
But, like all bubbles, this one, too, eventually pops. Naturally, Wall Street doesn’t want an uncontrolled collapse of the market (after all, they wish to get themselvesout before a crash), so, their ideal scenario is to create a controlled crash. Once the writing is on the wall, they themselves sell out, just prior to a trigger that will collapse the market.
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