No one can deny that the world is a very different place than a month ago. The world markets have tumbled, banks and even countries (Iceland) have gone insolvent. The one thing that occurrences like this create is experts. Experts in the “inevitable” correction in the markets. They sit on BBC and CNN and tell us how all the indicators pointed to this. My do they sound so smart. If only they would have told us this beforehand. Perhaps they were too busy telling us other things.

Human nature is a wonderful thing. Often it is devoid of any logic. There is a degree one can specialize in related to the psychology of markets: how sentiment is created and followed. But some are wiser than others. Some understood the fact that there was no real value in the markets and that sentiment was driving the bubble to a point where it was bound to burst. Despite their advisors’ advice to stay in the markets, they liquidated their positions and invested in cash and safer havens. As the markets rose even higher, they were constantly reminded how unwisely they had invested.

I drove past a friend of mine’s old business last week. “What are you doing still in Raizcorp?” he laughed. “Stop wasting your time. Join me in my business.” He pointed to his new shiny Mercedes Sports Car. “I bought that cash, and I just put a 50% deposit on a R12 million house this morning.”  

“How do you make so much cash from your business?” I asked naively.

“Oh, its not just the business. I use that to generate the deposit to put into this big development in Limpopo. All I do is put down R1 million every 2 months and they use it to start building homes on this estate. I then get back R2 million 3 months later.”

“Have you ever received the R2 million?” I asked

“Are you insane? I just reinvest it and double my money again,” he retorted.

“How do you know that they will pay you?” I enquired.

“I’ve seen the balance sheet, this development is worth hundreds of millions of rands, and I have a fantastic relationship with the guys. Hey, buddy, if you want to get in I can speak to the guys and get you a piece of the action. We are making a killing.”

As I said before, I drove past my friend’s OLD business. This time I listened to my instinct; it didn’t add up. And despite the perceived reality of success, i.e. the car and the house, I was unconvinced for two reasons. Firstly, I never understood how it worked and secondly my gut said don’t do it. My friend was not so lucky. He lost his car, his house and his business.

I am not immune to the hype of markets, I am not immune to getting involved in things I do not really understand. I have, on many occasions, with the benefit of hind sight, made some rather reckless decisions.

The one thing that has protected me is the two rules I apply before investing in anything:

1: Do I totally understand what I’m getting into?; and
2: What is my gut feel?

Sometimes greed speaks so loudly that we cannot hear our instincts.