Extraordinary Popular Delusions and the Madness of Crowds

I have been flicking through this memoir (pictured) Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.  This book is about financial bubbles (manias) such as the Tulip mania in 1637, the South Sea Company bubble in the early 1700’s and the Railway Mania of the 1840’s.

However, as a value guy, reading this book got me thinking not so much about financial bubbles, but quite the opposite.  That is, my perception of the madness of crowds offering irrationally low prices for quality ASX-listed companies at times.

As an investor and keen student of the markets past and present, I think this well known quote from the memoir aptly sums up market behaviour:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Here is some charts illustrating the opportunities to profit from this temporary madness over the past few years…..

Flight Centre Limited

Our Flight Centre article from March 2013

Credit Corp Limited

Our Credit Corp article from August 2012

JB Hi Fi Limited

Our JB Hi Fi article from February 2012

The Edge Fund has identified a number of stocks that currently exhibit the same characteristics being:

  • Great quality businesses
  • Sold down by the crowd
  • Despite intrinsic value rising

The Edge Fund has bought some of these companies already such as DWS Limited. And, we have our eye on a few more good companies to buy in the coming months once the crowd has finished selling.

So, while my perception is that the crowd has madly sold (and is still selling) some quality companies, I am delighted to be buying these companies with a view to profiting over the next 6, 12, 18, 24 months as the crowd come to their senses slowly, one-by-one.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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