Human Scorpions
Stock markets had a volatile week. Despite strong gains on Friday, the S&P 500 ended the week down 0.95%, and the Nasdaq declined 0.8%. The Dow slid even more, with a 2.27% weekly loss.
Many of you might be familiar with the fable of the Scorpion and the Frog. A scorpion who can’t swim asks a frog for help crossing a river. After initially declining out of fear the scorpion would sting him, the frog is persuaded to help after the scorpion makes the case that, should he sting the frog, they’d both die since the scorpion would fall into the river and drown. So it wasn’t in his interest to sting the frog.
And then, halfway across the river, the scorpion stings the frog and dooms them both.
Why? Because scorpions will be scorpions. Scorpion nature is what it is.
And, likewise, in the markets, especially during the best and worst markets, humans will be humans. They’ll get greedy. They’ll get fearful. They’ll extrapolate the present far into the future, and they’ll let their emotions get in the way of making good decisions.
It’s one of the reasons it’s worth studying history. We study history to help us understand human nature, and how that nature behaves in markets so that we can take advantage of Mr. Market when he makes errors. As Warren Buffett wrote in his 1987 Annual Letter to Shareholders: “Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful.”
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