When Hubris Grows, Can a Market Crash Be Far Behind?

b1“Hubris … extreme or foolish pride or dangerous overconfidence” (Wikipedia)

There is so much information going around that it is almost impossible to see through it all and make informed decisions. As Johann Rupert says, if he could accurately predict the time when shares are going to rise or crash, he would be the richest man in the world.

We know that before a bust there is a boom which usually ratchets up to dizzying proportions. People see prices rising and blindly assume that they need to get in and make a profit – overconfidence and hubris become dominant. This just fuels more price rises until the boom stops and just as quickly prices drop.

Of course, Johann Rupert is right – it is impossible to forecast the top of the boom – but there are some interesting pointers that may be able to tell us that a crash could be imminent –

  • The skyscraper scenario

Deciding to build the world’s tallest building is a classic case of hubris. In 1930, the Chrysler Building became the world’s highest skyscraper and was quickly surpassed by the Empire State Building in 1932. The planning of these skyscrapers was done just as the Great Depression set in.

The World Trade Centre (1974) came just before the stagflation of the mid to late 1970s. The Petronas Towers in Malaysia became the world’s tallest buildings just before the Emerging Market Crash in 1998. The Burj Khalifa broke the world height record on its completion just prior to the Global Financial Crisis in 2008.

Keep an eye on this with Wikipedia’s “List of future tallest buildings” here.

  • Sotheby’s

Another good indicator of a crash is said to be the share price of Sotheby’s. When people are full of hubris they bid high prices on art. This drives up the price of Sotheby’s stock. The mega art prices come mainly from successful businessmen and when they expect their businesses to begin cooling off, they stop buying art. This feeds into the Sotheby’s share price which begins to quickly reverse.

Keep an eye on this by Googling “Sotheby’s stock price dollars”.

In terms of having a strategy as to when to exit a rising market, it pays to watch these two indicators and when they start rising at a slower pace, take advice on whether it might be time to begin to start selling. You will never get the actual timing of a crash right but if you have got rid of the bulk of your investments before a crash, you will be doing well.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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