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Three Signs Of Market Madness

Fear can do some strange things to people.

I can remember, as a kid, hiding behind the sofa whenever Daleks appeared on Doctor Who. To a young boy, still in short pants, those human-sized, pepper-pot shaped cyborgs were downright scary.

What about the Klingons when they made their entrance on the show? You really don’t want to know what I did when that happened. Those swarthy characters who spoke in a guttural alien tongue were pretty frightening too.

Fear isn’t something that only affects children. We, adults, can sometimes get scared too….

…. It’s only natural. It is part and parcel of being a living entity. It’s called survival.

Staying alive

To stay alive, we can either stand our ground and fight or we can turn and take flight in the face of danger. Some people choose the latter.

But when I think it about it now, it makes very little sense to duck behind a settee just because an electronic image (albeit a pretty frightening one) has appeared on the screen of a square box in the corner of a room. What use is a sofa against the exterminating powers of Daleks?

The same goes for investing.

Many people choose to take flight in the face of market uncertainty. It might seem sensible to do so at the time. But in reality it is utter madness, with the benefit of hindsight.

Safe haven #1

Consider, for instance, when a number of people jumped for cover by buying the Chinese yuan because they thought danger was just around the corner. They said the Chinese currency was a safe haven in times of a nuclear war. Who peddles this nonsense?

Since when has the renminbi been a safe haven?

Are we talking about the same tightly-controlled currency that is manipulated by the People’s Bank of China? The central bank sets the daily reference rate rather than allow the market to determine the proper value for the currency.

What’s more, there are strict restrictions on the Chinese yuan. Chinese and non-Chinese citizens cannot take more than the equivalent of US$50,000 out of the country. So which part of those three things about the renminbi makes it a safe haven?

Safe haven #2

Next we have investors who continue to pile into cryptocurrencies because they are also perceived as a safe haven. But seriously, can currencies that are mined through computer algorithms really be a safe haven?

It’s true that cryptocurrencies, such as Bitcoins, have gone up manifold in value. However, that is not a good reason to buy them.

Its value is based on readiness by some people to attribute a value to something that has little or no value beyond what they are prepared to pay for it.

But that is unlikely to stop the hawkers. Peddlers will not hesitate to sell investors anything that they are willing to buy, through a lack of understanding of what they are buying in the first place.

Safe have #3

People who pile into poor value bonds are another sign of market madness.

Demand for German bonds has pushed their borrowing cost down to their lowest levels for months. Investors could not stuff enough of the loan notes into their pockets.

In fact, they were prepared to even accept a negative return on two-year German bonds because they were deemed to be a safe place for their money…..

….The German Finance Agency must have been laughing all the way to the Bundesbank, when they sold four billion euros of its new “Schatz” bonds at an average yield of minus 0.74%.

Deliberate, cogitate and digest

Market madness is nothing new. For instance, people who buy shares for non-value reasons are more than likely to ditch them for non-value reasons too.

As global markets climbs ever higher, it becomes increasingly more important for us to choose our investments with even greater care. The low-hanging fruits of the stock market have been plucked, eaten and digested.

But there are still opportunities galore both here and abroad. However, it is important to deliberate and cogitate carefully before we choose our next purchase.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock - Singapore, The Motley Fool's free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.