While writing out my notes on Why You Win or Lose, two stories stuck out that are worth sharing. The first one is a simple analogy using ice cream to show how investors drive market prices to irrational levels, then see it all come crashing down:
My friend, Willard Kiplinger, well-known savant of Washington, gave me an extemporaneous explanation of how fictitious stock values, forced up by greed, must collapse.
He and I and another friend were having dinner together when Kiplinger remarked: “I suppose the stock market is like this: Here I have a dish of ice cream that cost me ten cents. Robert, the waiter, comes in and says the ice cream is all gone and no more is to be had tonight. My ice cream suddenly seems more valuable to you and you offer me, say, twelve cents for it. Then Bill, who had intended to order ice cream, makes you an offer of thirteen cents. You, being Scotch, can’t resist taking a profit. Bill brags so much about the ice cream that I decide I was foolish to let it go in the first place and buy it back for fourteen cents. About that time I discover, to my dismay, that the ice cream has melted.”
The second story is about the irrational crowd behavior leading up to and following the Great Crash of 1929 (emphasis mine): Continue Reading…