The Ascent of Money - Part 3
In Part 1 - Dreams of Avarice, Ferguson explained where money originated, where lending money began, and how it grew to the larger-scale business of banking.
In Part 2 - Human Bondage, we learned how the ability to sell debt obligations to raise money allowed countries to rise to prominence and how the ability to buy and sell those instruments formed a market where bonds could be traded.
In part 3 of the series, titled Blowing Bubbles, Ferguson takes us back to the origins of publicly-traded companies, stock markets, and the bubbles that have accompanied them from the very beginning.
The ability of investors to invest in a company, share in the success of that company, and be able to sell their ownership stake in the company if they felt their profits were at risk, formed the basis for how stock markets work today.
The Ascent of Money (Part 3): Blowing Bubbles
There are a few topics covered in the video that we would like to reinforce.
Stocks and Their Market
Stocks are basically pieces of ownership in a company that have a value based on how much prospective buyers are willing to pay for a share and how much owners of shares are willing to sell them for (a.k.a. supply and demand).
The stock market at large brings together people looking to buy stocks and people looking to sell stocks, and it provides a medium by which they can do business together.
Human Emotions and Herd Mentality
Technically, the market value stock shares is based on supply and demand. However, if you dig deeper and examine why people buy and sell, you’ll find that their values are essentially based on human emotions.
In other words, people buy or sell because their emotions tell them it is time to buy or sell. Human emotions can be affected by a number of things, one of the most powerful of which is what people see their fellow humans doing.
If everyone around you is investing in something and you are constantly hearing about how great of an investment it is, chances are you are going to wind up investing also. If a year later, everyone is rushing to get out of that investment, chances are you are going to try to get out along with them.
Bubbles and Explosions
This herd mentality causes bubbles and later, causes explosions where those who didn’t get in at the very beginning lose huge amounts of money.
How do you avoid being influenced by herd mentality?
Take what everyone else is doing out of your criteria for investing. You shouldn’t be taking that into consideration anyway. You should be focusing on whether the price of the investment is less than what you (and only you) think it is worth.
Fraud and Schemes
The last thing we’d like to call attention to is the opportunity for fraud that presents itself from there being a difference between those that own shares in a company and run the company and those that own shares in a company and do not run the company.
Those individuals that are in charge of running companies have the ability to withhold important financial information from the rest of those who own shares in order to save themselves financially when things start to go downhill. This is fraud, it displays a lack of integrity on the part of the company’s management, and you should get out of an investment at the first sign that there may be fraud occurring.
Go to the next post in the series - The Ascent of Money (Part 4) - Risky Business.
Learn more about Niall Ferguson at his website - NiallFerguson.com.
Buy Niall Ferguson’s book - The Ascent of Money: A Financial History of the World.
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