12 Steps to Market Meltdown

Stephen Vines writes in The Spectator about the enduring trends of stock markets:

At times of financial crisis there is often a feeling that all the old certainties have been blown away. But what is striking about the entire history of stock-market crises is that they fall into a pattern — and this pattern makes it possible to make broad predictions about the panic cycles that have been remarkably consistent for more than a century.

American experts have dominated the sub-genre of identifying panic cycles, notably the market historian Charles Kindleberger and the economist Hyman Minsky. Based on their work, it is possible to identify the stages of the cycle — but not, to pre-empt the obvious question, to know exactly when it will end.

You can read the 12 steps by reading the linked article. Of course, the question most want to know is are we near or at a bottom? Vines ends with this:

Looking for the bottom of the market is largely a futile task. Nathan Rothschild, one of the founders of the bank that bears his name, modestly used to say, ‘I never buy at the bottom and I always sell too soon.’ Even if he is taken at his word, this does not diminish his financial reputation, because practically no one has ever been clever enough to spot the peaks and troughs. Yet it is possible to identify trends.

The time to return to the market is generally marked by an end to extreme volatility; sure, the best bargains will have gone by then but so will the false dawns that lure in the witless, convinced that sharp price rises mean they need to rush back in the market. Investors with a really long-term perspective will simply wait until compelling valuations emerge on shares they think are trading at bargain basement levels, even if the basement keeps getting lower. That, basically, is the Warren Buffett view of share-buying. But interestingly, these days he’s less attracted by playing the stock market than by direct investment in undervalued companies.

Comments

[eddie bravo]

vines' book 'market panic' is well worth a read in this environment.

[John]

eb: Thanks for the mention of the book and the title -- I wasn't aware he'd written it.