Jared Levy, Editor, Smart Investing Daily
Friday, 27 May 2011
From a young age I can remember my father saying, “Those who forget the past are doomed to repeat it.” My father was talking about the wars and mistakes that people and governments make. Those mistakes have thrown many economies and whole countries into turmoil and in the worst of cases caused the deaths of many.
As I get older, I notice that many of us have heard this saying. We try hard to live that way.
A person who doesn’t drink coffee may not know to check how hot it is before he takes a big gulp. He burns his mouth, but that shocking (and painful) experience would make him more cautious and take a smaller sip next time. This memory would most likely last the rest of his life.
You can find examples of this all around you!
Another might be taking a curve at high speed in your car and having to brake violently to avoid an accident. I bet your next trip around that curve would be much slower and more calculated.
Financial markets, on the other hand, are different.
They would have no problem trying to take that turn at a high speed again and again, even if they had crashed before. Recognizing when the market is acting “irresponsible” can make you (or save you) a lot of money.
There are several reasons for this.
Financial Market Amnesia
The stock market has a sort of amnesia. It tends to forget about major catastrophes and serious geopolitical effects that can have a prolonged impact. It also tends to disregard — or at least discount — the impact these past scenarios have when they repeat themselves.
The “Flash Crash” caused complete pandemonium for a day about a year ago. We still don’t have a clear answer to why it happened. Many experts (including me) believe that the flash crash could happen again. There are major flaws in some of the financial trading products (like certain ETFs) but the market doesn’t see them.
Right now, there are a plethora of major market uncertainties around the globe and talk of housing other economic bubbles in China as well as bubbles in commodities that could send stocks sharply lower.
Just recently are we beginning to see some cracks in the market’s foundation, but the market still remains oblivious…
So why doesn’t the stock market “care” about Read more