Does Prices lead to Crisis ?



“While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster” – Benjamin Graham 

A heavyweight in the world of financial investment, Warren Buffett sought out his mentor Benjamin Graham , after reading Graham’s book The Intelligent Investor in 1949, the author became Buffett’s idol.

In financial world enthusiasm is the recipe for disaster and therefore most financial worries start with one behaviour ” Enthusiasm ” . Here reference to Wall Street can be inferred as any major investment decisions , to get the context right .

Very often higher prices or someone else making money creates a sense of enthusiasm and confidence followed by getting into an immediate action mode , at times this behaviour leads to unwanted worries and pain which could have been avoided had this behaviour fallacy being known , and this is what human behaviour is all about , and when money comes into the equation the behaviour is strong motivator leading to an outcome which may not always be desirable .

This is how it begins

  • Crowd comfort in buying – do what everyone does
  • Past is the guarantee of future performance – look at past and read into the future
  • Extrapolating Projections in long range – super impose some data point and magnify
  • Focus on Asset First & Goal later – Too much importance to a trade or transaction  or societal status and goals becomes secondary
  • Forget to ask key questions in terms of financial orientation of beneficiaries – so many times we are decision makers , after us its vital to see if the better half is equally competent to understand the nuances of the financial decisions , invariably we collect assets without answering this question .

This is how it Ends with

  • Disappointment on returns – too much one sided thinking pushes prices upwards , leading to loss of affordability , and good economics prevail in longer run .
  • After Thought – Assuming a liability to build an asset , a good example is soft launches which have now stopped after regulations or a second home when there is no time to be in your own home .
  • Recurring expenses – Some assets deplete if not maintained leading to more outflow and falling returns , especially a plot of land , if not maintained leads to encumbrance   or agricultural land where regular maintenance is a pre-requisite .

If we are able to see this behaviour within us and be aware will avoid major disappointments as the gurus say it is better to be less enthused in the beginning stands a better chance of taking a right decision .

A lot of people take plunge into startups , many fail , few survive , not to say that one should not take the plunge , but if it begins with less enthusiasm especially at the drawing board , it will lead to more sensible decision making and higher chances of survival .

I am ending the note with re-emphasising the quote “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster” – Benjamin Graham 


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