“I Can Calculate the Motions of the Planets, but I Cannot Calculate the Madness of Men” ~ Sir Isaac Newton

The man who is credited with discovering the laws of gravity was evidently unfamiliar with the laws of gravity in financial markets. One of the greatest episodes of market history occurred in 1720 with the South Sea Stock Bubble, a bubble in which Sir Newton evidently lost his fortune.

The story of the South Sea Company is one which all market speculators should learn from; it has all the key ingredients of a fantastic stock promotion, which evolves into a bubble, then ultimately a massive crash.

I believe the biggest lessons from the story of the South Sea Bubble have to do with the power of greed, and how it can cause otherwise sensible people to lose their minds….and eventually their shirt.

Any stock that can rally 10x in six months, can also fall very hard, very fast. This is especially true when that 10x rise was built upon a foundation of sand.

We have seen some recent examples of greed and ‘the madness of men’ in the Canadian small cap equity markets. Charts like this one…..

SONA.CA (January 2020 - August 3, 2020)

Can easily end up looking like this….

I’ve seen some crazy bubbles in my lifetime, but SONA Therapeutics (CSE:SONA) and its run from pennies to $16.05 per share over the span of six months definitely has a place near the top of the list. 

Over the years I’ve noticed that every bubble has a few key characteristics:

  • A new technology/phenomenon (think cryptocurrency, a novel virus that is sweeping the world, or internet stocks in 1999).
  • There is always some truth to this technology/phenomenon.
  • The market and the madness of human beings then takes that shred of truth and extrapolates it into a massive bubble (i.e. “it’s different this time”).
  • The biggest bubbles manage to turn the early naysayers into late adopters (see Sir Isaac Newton and his South Sea Bubble above).
  • The herd gets caught in the bubble and stays “stuck” long after prices have peaked. Usually because of some combination of the following logic “I can’t sell at a loss”...OR….”You only lose if you sell”.....OR…..”it will come back, i’m going to hold long term”.

Bubbles also tend to attract lots of unsavory characters and fraudsters who take advantage of the herd’s popular delusions (think about all those crypto frauds that were uncovered in 2018/2019).

Since we live during an era of instant analysis and commentary on every single market move and price tick I thought I would share some comments that should give anyone pause when they are being shared by your fellow longs:

“I have my life savings invested in this stock”

“Im Down.. ALOT and i bought more, Im riding this MF till the wheels fall off or Im rich”

“You don’t get rich being a pu$$y.”

“I just quit my job”

“Paper gains paper losses. Only traders care about the day to day pricing”

We can all get caught up in the emotions of the market, especially during wild news driven intraday price gyrations. I too am guilty of getting caught up in the emotions of the market at times. After all, we are all human and being emotional is part of what makes us unique....and in many ways beautiful. 

All of the comments in bold above display a level of certainty of the future that should concern anyone invested alongside these individuals. One of the biggest pitfalls that an investor can succumb to is allowing ones ego and self worth to become wrapped up into the share price of a company over which one has zero control.

Going “all-in” and declaring that “i’m going to get rich or die trying” is the sort of kamikaze behavior that should be reserved for a World War 2 battlefield. Betting too big causes us to lose objectivity. Wrapping my personal pride and self worth with declarations over future outcomes over which I have no control is unhealthy at best, and at its worst it can lead to very poor outcomes, both financially and emotionally.

The market is outside of me, it is not part of me. I have no control over the day to day movements of markets, and neither do you. Therefore, the most effective approach I can utilize is maintaining a healthy degree of skepticism while embracing the uncertainty that is always present. I am always open to being wrong, and I strive to never bet too big on any one trade or investment. If a trade goes against me I take my stop loss and move on. I understand this is the price of playing the game and I am happy to take a small loss, in order to avoid a much larger one down the road.

A trader can also trade any stock/market/crypto/currency, even taking a long position in a bubble stock for purely technical reasons, only to exit when the trade peters out

I know that my biggest mistakes in the market have always occurred when I lost my objectivity and became irrationally optimistic on the course of future events.

My father used to say that “people have an infinite ability to rationalize for their own benefit”, in markets we can conclude that “people have an infinite ability to rationalize for their own delusions”.

DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.