The Corner for Nov. 15, 2013

Mania, as described in the dictionary is “an excessively intense enthusiasm, interest, or desire; a craze.” Would you feel safe if you were involved in something which resulted in you fitting this description? Not me! Over the past 15 years or so the word mania has been increasingly used by the mainstream financial press to describe investor behavior in a number of different areas. In the past there has been “IPO mania, tech mania, DotCom mania, day trading mania, etc.” And as this word has become more and more used, people have become accepting of the behavior. It is as if it’s all right to get caught up in manias and the once negative inference of the word, has become fashionable — at least for a while.

In the famed book “Manias, Panics, and Crashes,” Charles Kindleberger writes, “The word ‘mania’ in the chapter title connotes a loss of touch with reality or rationality, even something close to mass hysteria or insanity. It is used continuously in economic history, which is replete with canal manias, railroad manias, joint stock company manias, land manias and a host of others. Yet economic theory, along with social science generally, adopts the assumption that man and men are rational.”

Any good market historian knows that manias end in disaster. When this occurs the historians that write the epithet, don’t invent a new word to describe what happened. They use an old word whose long-term meaning does not change. The word they use is mania, “a craze.” And years later, when the idea of mania returns to its rightful place, the readers of those histories know exactly what those writers mean about the period they are describing.

This aspect of human of behavior in the markets is driven by rapidly rising prices. The late Richard Ney told me that, “rising prices pull investors into the market like iron filings to a magnate.” And boy is he right. During the DotCom bubble of the late 1990s people threw common sense right out the window. People fell all over themselves crawling into the stocks of companies that little or no prospects, little earnings and high stock prices.

Speaking to the tulip craze in Holland during the 1630s, Mike Dash in his book “Tulipomania,” writes, “The final liquidation of the Dutch mania at the beginning of 1639 left many Hollanders with a distinct aversion to tulips … Yet the world had not seen the last of tulip mania. Like bubonic plague, it was a strange and complex disease that could rage for a while and then seem to disappear when — like plague —it was really only lying dormant. And like plague, it could reappear miles away and decades later, as virulent as ever.”

Quote of the week: “Speculative excess, referred to concisely as mania, and revulsion from such excess in the form of a crises, crash, or panic can be shown to be, if not inevitable, at least historically common.” – Charles P. Kindleberger, “Manias, Panics, and Crashes: A History of Financial Crises.”

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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