Sunday, October 12, 2008

stop eating just before you're full

Stock Market Crashes

Everyone believes they will cash in before the crash. You can dub this delusion the 'superior timing fallacy'. In reality no-one knows whether a bad day is a technical correction, a dip before the weather brightens up, or the beginning of winter.
Conventional indicators for measuring market movements are of little help. Even when P/E ratios and yields suggest that shares are overvalued and heading for meltdown, the bullish argue that history is bunk.
The problem is that if you come out of the market too soon, you will watch others making hay; stay in too late and your savings will be washed away. But knowing when to sell is as difficult as following a diet based on stopping eating just before you're full. 
Cautious investors can frighten their friends by whispering Black Monday, when [in 1987] Wall Street dropped 20% in the same day. Shares took five years to crawl back to the same point.
- Anne Gordon, The Bluffer's Guide to Stocks & Shares, Oval Books, reprinted 2000, p.40 

Some argue that The Panic of 1857 is more analogous to current circumstances.