First lesson of ?29 crash

May 17th, 2007

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Continuing from our previous article, The Great Crash of 1929, what lessons can we learn from that Great Crash?

First, the greatest danger lies when bullish sentiments are at the extreme. This may sound counter-intuitive, but it makes sense when you think deeper about it. By the late 1920s, speculative boom had led to millions of Americans to invest heavily in the stock market, even borrowing money to do so. By September 1929, bullish sentiments were at its peak when the stock market reached a record high.

Right at the stock market peak, the expectations of everyone will be overwhelmingly positive on the stock market. However, as you can attest from personal experiences, whenever your expectations are dashed, your mood can easily turn from gladness to madness?the greater the initial euphoria is, the greater the disillusionment will be. In the same way, during a stock market peak, when the crowd?s overwhelmingly optimistic expectation was ruined, their mood can easily turn overwhelmingly pessimistic. In a flash, extreme greed can give way to extreme fear.

This reminds us of what is happening in China right now. We heard that people over there are using their house and retirement funds as collaterals for borrowing money to speculate in stocks.