In one week the Japanese stcok market lost more value than the whole of the Russian economy. So why did the (t)roubles in Russia cause such a fall in stock markets around the world? Probably less than one per cent of the US exports go to Russis so why should the NY exchange show such large falls?
Because of 'the game': the investor 'game'.
As an investor you cannot make money on a steady market. You can make money on a steadily rising market but there comes a time when the P/E ratio is so out of line that the market cannot go on rising.
The best way to make money is on a fluctuating market that rises and falls. But economic realities will not do this for you - at least not across the whole market. Also with 'economic realities' you cannot be in a privileged position. So what do you do? How is the game played?
An inner group agree on a synchronising signal. This does not mean that they sit around in a conspiracy and discuss this. Each investor, independently, knows how to recognise a synchronising signal. This should be something with a lot of publicity. The Russian troubles had much more publicity than Japan's continuing problems because the Russian troubles were an 'event'. There should be such enough economic plausibility to argue a rational case as to why the market should fall. But this should not be as obvious that it is obvious to everyone at the same time.
Having agreed this synchronising signal you sell early. This drives the market down. Others do not want to be left behind so they sell too. The market goes down further. Eventually, you buy again near the bottom. So the cycle starts again. Those on the inner circle always make money. Those on the outside mostly lose money but they make enough from time to time to keep motivated.
Almost everyone knows the game. So why don't investors just stay with their investments? Because they are so strongly tempted to sell and take a profit. When they do not make money they only blame themselves for not having been quick enough. So next time around they will act sooner. So the cycle will get steeper.
It is a game and people intelligent enough to play the game the way the rules are written.
Suppose there was a tax on selling. This tax would be directly related to the overall decline of the market. This would mean that it no longer made sense to sell when the market was declining. But you could sell stock at other times. This would take the casino effect out of the game and would therefore to totally unacceptable to all in the investment business.
Edward de Bono
6th September 1998
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