For decades, there was a widely held belief that every 4 years or so, the arctic lemming population skyrockets until it reaches a critical mass of hundreds of thousands. Once this occurs, conventional wisdom has it that the lemmings then start a mass migration towards the sea, and that as they get closer to the seawater they begin a mad rush over the edge of cliffs and fall their deaths down below in a heaving, foaming frenzy.
Recently however, a group of scientists who carried out a lengthy study of the creatures in their natural habitats, discovered that the boom and bust cycles of the lemming population is caused by predators and not by mass suicide as was originally thought. Furthermore, the scientists found out that there was a strong correlation between the population density of lemmings and that of stoats who are their main predators. In essence, the correlation is such that the stoat population density reaches its peak roughly 12 months after the peak in the lemming population.
When you come to think of it, financial markets also follow this same pattern of population dynamics in nature. If one imagines the lemmings as assets like commodities or stocks and the predator stoats as investors, which in a sense they really are, the operation of the financial markets can be seen to follow a similar pattern of booms and busts. By way of example, during the tulip bulb mania in 17th century Holland, a single bulb of the gouda species was selling in 1637 for the equivalent of $76,000 in todays money, and many people in that country sold all their worldly possessions in a mad rush to acquire the tulips. In fact the popular refrain at the time was that the prices of the tulips will always go up.
Just like the predators who prey on the lemmings, people soon started to realise that the profits to be made from buying and selling the tulips were getting thinner and thinner until they became non existent. This not surprisingly soon led to a wholesale dumping of the bulbs by speculators to the extent that in less than 6 weeks tulip prices fell by more than 90%. As always, the aftermath of the crash was widespread financial ruin and bankruptcies among those who had bet the farm on the continuation of the mania.
Other instances of market history which have followed the same boom bust cycle found in nature, include the Great crash of 1929 and more recently the tech crash at the beginning of this century. However what I find totally amazing and mindboggling about these examples of market mania is that no matter the extent of the carnage and financial devastation, a new crowd of "investors" just like the stoats in the above study, arise from the ashes of the crash and in good time, latch on to another object of speculative desire. Memories of the last bust are soon forgotten and as surely as spring follows winter, new and persuasive arguments are put forward about the superlative investment qualities of the new asset class. Prices soon start rising, slowly at first and then they begin to accelerate. Pulses also start racing and a frenzy soon ensues to invest in the choice asset and capture the quick and easy profits that are there for the taking. Caution is thrown to the wind and those who preach it are labelled as old timers who just don't get it. At the peak of the speculative mania, euphoria reigns supreme and there is an almost universal belief that the strong price gains will continue.
However, what the crowd does not realise at this stage is that the gains, just like the arctic lemmings, are fast disappearing until one day, out of the blues there is a sudden realisation that the asset is no longer worth the prices that have been paid for it. Everyone then makes a simultaneous mad dash for the market exits but unfortunately it is usually too late by this time and fortunes are lost in due course. I believe we are witnessing this scenario right now in the commodities market which I first flagged as a prime crash candidate in August 2006. Predators beware.
Happy Investing.
Recently however, a group of scientists who carried out a lengthy study of the creatures in their natural habitats, discovered that the boom and bust cycles of the lemming population is caused by predators and not by mass suicide as was originally thought. Furthermore, the scientists found out that there was a strong correlation between the population density of lemmings and that of stoats who are their main predators. In essence, the correlation is such that the stoat population density reaches its peak roughly 12 months after the peak in the lemming population.
When you come to think of it, financial markets also follow this same pattern of population dynamics in nature. If one imagines the lemmings as assets like commodities or stocks and the predator stoats as investors, which in a sense they really are, the operation of the financial markets can be seen to follow a similar pattern of booms and busts. By way of example, during the tulip bulb mania in 17th century Holland, a single bulb of the gouda species was selling in 1637 for the equivalent of $76,000 in todays money, and many people in that country sold all their worldly possessions in a mad rush to acquire the tulips. In fact the popular refrain at the time was that the prices of the tulips will always go up.
Just like the predators who prey on the lemmings, people soon started to realise that the profits to be made from buying and selling the tulips were getting thinner and thinner until they became non existent. This not surprisingly soon led to a wholesale dumping of the bulbs by speculators to the extent that in less than 6 weeks tulip prices fell by more than 90%. As always, the aftermath of the crash was widespread financial ruin and bankruptcies among those who had bet the farm on the continuation of the mania.
Other instances of market history which have followed the same boom bust cycle found in nature, include the Great crash of 1929 and more recently the tech crash at the beginning of this century. However what I find totally amazing and mindboggling about these examples of market mania is that no matter the extent of the carnage and financial devastation, a new crowd of "investors" just like the stoats in the above study, arise from the ashes of the crash and in good time, latch on to another object of speculative desire. Memories of the last bust are soon forgotten and as surely as spring follows winter, new and persuasive arguments are put forward about the superlative investment qualities of the new asset class. Prices soon start rising, slowly at first and then they begin to accelerate. Pulses also start racing and a frenzy soon ensues to invest in the choice asset and capture the quick and easy profits that are there for the taking. Caution is thrown to the wind and those who preach it are labelled as old timers who just don't get it. At the peak of the speculative mania, euphoria reigns supreme and there is an almost universal belief that the strong price gains will continue.
However, what the crowd does not realise at this stage is that the gains, just like the arctic lemmings, are fast disappearing until one day, out of the blues there is a sudden realisation that the asset is no longer worth the prices that have been paid for it. Everyone then makes a simultaneous mad dash for the market exits but unfortunately it is usually too late by this time and fortunes are lost in due course. I believe we are witnessing this scenario right now in the commodities market which I first flagged as a prime crash candidate in August 2006. Predators beware.
Happy Investing.
