Page 164 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

But I don’t think you can call all of them irrational.

COBACOBA
The formation of bubbles isn’t so much about people irrationally
participating in long-term investing. They’re about people somewhat
rationally moving toward short-term trading to capture momentum that had

been feeding on itself.

What do you expect people to do when momentum creates a big short-term
return potential? Sit and watch patiently? Never. That’s not how the world
works. Profits will always be chased. And short-term traders operate in an
area where the rules governing long-term investing—particularly around
valuation—are ignored, because they’re irrelevant to the game being
played.

That’s where things get interesting, and where the problems begin.

Bubbles do their damage when long-term investors playing one game start
taking their cues from those short-term traders playing another.

Cisco stock rose 300% in 1999 to $60 per share. At that price the company
was valued at $600 billion, which is insane. Few actually thought it was
worth that much; the day-traders were just having their fun. Economist
Burton Malkiel once pointed out that Cisco’s implied growth rate at that
valuation meant it would become larger than the entire U.S. economy
within 20 years.

But if you were a long-term investor in 1999, $60 was the only price

available to buy. And many people were buying it at that price. So you may
have looked around and said to yourself, “Wow, maybe these other
investors know something I don’t.” Maybe you went along with it. You
even felt smart about it.

What you don’t realize is that the traders who were setting the marginal
price of the stock were playing a different game than you were. Sixty
dollars a share was a reasonable price for the traders, because they planned
on selling the stock before the end of the day, when its price would

probably be higher. But sixty dollars was a disaster in the making for you,
because you planned on holding shares for the long run.