Zbigniew Piekarski on sucker's rallies and Finnish delights
The others are July, January, September, April, November, May, March, June, December, August, and February. - Mark Twain, "Pudd'nhead Wilson's Calendar"
This week I was about to reveal one of the most important secrets in the world of investing, but that will have to wait until next week.
So, let's consider the perspective.
A long, long time ago shipowners and merchants met in the coffeehouses of most major ports and traded pieces of paper. These pieces of paper enabled them to share the risk of each perilous voyage and, if the ship survived, share the proceeds.
As trade grew and fleets expanded, they hired others to act as bookkeepers and to settle disputes. The more intelligent bookkeepers realised that they could earn a little bit more money by acting as middlemen.
They learned quickly and realised they could apply these principles to any market, buyers and sellers alike, and talk percentages as an introductory fee. They were not concerned with what was being bought or sold or who was doing the buying or the selling. Thus was born "The Exchange".
They earned money on the Tulip Craze which bankrupted the Netherlands in the 17th century as merchants valued one tulip bulb at par with a medium-sized estate - until it caused a market crash and national bankruptcy. As the market rose, the individual investor's intelligence increased. He was wise, he was clever, and he could do no wrong. When the inevitable crash came, it was the fault of others.
In the 18th century the exchange helped the British government to liquidate a large chunk of the national debt through the paper promises of the South Sea Company and imaginary South American riches. The price was the bankruptcy of aristocrat and commoner alike, the first display of effective democracy.
As South Sea Company shares boomed, the individual investor's intelligence increased. He was wise, he was clever, and could do no wrong. When the inevitable crash came, it was the fault of others. He was swindled, he was lied to, and he was cheated.
With the onset of the Industrial Revolution, the exchange embraced the new capital raising function in the development of canals in the UK, then the railway mania. It benefitted from the mass hysteria and increased the turnover that these technologies generated, and then consolidated as the eventual crash destroyed another generation of investors on both sides of the Atlantic. After the Wall Street Crash of 1929, it took twenty years for the exchange to recover.
The modern "Cult of Equity" appeared only 20 years ago. The "masses" were finally allowed access to the benefits that the markets could provide, albeit through a third party such as banks and insurance and investment companies - which all took their percentages. In 1982, there were only 857 mutual funds in the US. By 1990, there were 3,079; by 1995, 5,725 and in 2000, 8,155.
Despite temporary setbacks, the market strove ever upwards, and income for the exchange increased. By now all parties paid. They paid to be on the exchange; they paid to be in the exchange; they paid for each transaction; they paid for education; they paid for regulation; they paid for related services and they just paid to pay - for times were good. We were living through a secular bull market interrupted by cyclical bear markets.
It is pure bad luck that the WSE appeared on the scene towards the tail end of the biggest period of hype since the South Sea Bubble. And it's you and I who were responsible for that hype.
As the market rose, our intelligence increased. We and our greed was our motivator. When the inevitable crash came, it was the fault of others.
We reached the top of the mountain a few years ago. Now we must return to base camp where price earnings ratios approach the bottom end of historical norms. We are now in a secular bear market interrupted by cyclical bear markets. And this will last for a number of years.
So what does a business do to survive? If you cannot increase turnover because there is a lack of demand and the amount that you can charge is fixed, then you have to cut costs. A merger is always one solution and, in the case of a prospective merger between the Helsinki and Warsaw exchanges, perhaps a fitting one. After all, the pension and investment funds would benefit to the extent of adding another couple of stocks to the three they already know so well.
But living in the centre of Warsaw, I cannot help but think that it would be a union of MarcPol with Sezam with a greater choice of similar goods and an overabundant staff gossiping in the aisles and hindering the shopper. It would never be a Tesco or a Geant.
In addition, I just wonder what a union of HEX with WIG would produce. A pechowa peruka?
N.B. What has happened over the past couple of weeks is a sucker's rally. I call it the "rope a dope on a little bit of hope" trick. The pattern is always the same and consists of four phases:
Phase 1: One-two-three-day rallies, sparked by intervention at key support levels.
Phase 2: Short covering drives violent upside surge in indexes.
Phase 3: Day traders come in and increase short-term momentum.
Phase 4: Janusz Public comes in at the end of the rally after the uptrend has run out.
Suckers are always lured into stocks just before the bad news clobbers the market forcing it lower.
"There are two times in a man's life when he should not speculate: when he can't afford it and when he can." - Mark Twain.
