15 April, 2021

A Covid-Era How-To For the Money-Wise

Lessons on investor behaviour during the unprecedented pandemic

A Covid-Era How-To For the Money-Wise

Booms and bull runs lead to “irrational exuberance”, a term coined by Alan Greenspan, former chairman of the US Federal Reserve, in 1996. More than a century before him, author Charles Mackay ­explained the phenomenon succinctly in his aptly titled book, Extraordinary Popular Delusions and the Madness of Crowds. He presciently wrote, “Every age has its peculiar folly...into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”

Panics and investment pandemics, in contrast, lead to another kind of herd mentality, a lunacy that too is irrational and dynamic. However, what drives it are the pain of loss, inevitability of volatility, and a desperate need to protect savings. Only in retrospect do investors realise the bitter truth in both cases. Economist Robert J. Shiller explained this about two decades ago when he wrote that the markets do not always ­reflect the “sum of the available ­economic information”.

What he implied was that the present prices of...

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