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Over the last few weeks, bullishness has soared as investors seem more embolden now that the collapse of high-flyers seem to be over (especially after the news on Open Table last Friday). Bullishness, as measured by the American Association of Individual Investors, is well below levels associated with stock market tops, but it is at the highest level of the year. Moreover, at 44.7%, the percentage of a bullish individual is noticeably higher than the historic average of 39.0%. Interestingly, there should be this much disdains and fear of regular people putting their hard earned money in the stock market.
"I knew it was time to sell when my shoeshine boy gave me a stock tip."
- Joseph P. Kennedy, Sr.
Long before Joseph Kennedy went to his office and sold everything, the enthusiasm from a shoeshine boy who had given him a stock tip disturbed him. There was the notion that the public was so prone to being wrong about everything, that when someone became excited about 'anything,' it was time for the smart crowd to quietly exit. This notion can be traced back as far as 1841, when Charles Mackay wrote: 'Extraordinary Popular Delusions and the Madness of Crowds.'
Mackay's book covers were all forms of delusions, including witch-hunts and frames, and the Crusades as a European mania, which unnecessarily cost the continent massive treasury and two million lives. However, the bubbles described in the book make it a timeless must-read for everyone, especially those investing in the stock market or seeking an understanding of the dangers of mass hysteria.
The three bubbles:
The tulip was an instant hit; first introduced to Europe in 1554, as a gift from the Ottoman Empire to Ferdinand I, the Holy Roman Emperor. By 1593, it was discovered that tulips grew better in the United Province, (now the Netherlands) and their popularity took off. Newly independent from Spain, tulips soon became a status symbol of the time. At its peak, a single tulip bulb was equal in value to ten years of annual income of a skilled craftsman.
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