- Anming - Sometimes two opposites are not far from each other. For example, some people say that there is a fine line between genius and insanity. And probably most of us have seen love changing into hate overnight. For me, life these days is ruled by the struggle between two other opposites – compassion and Schadenfreude.

For weeks I had to listen to people around me commenting on their portfolio developments. People in China from all walks of life kept their eyes fixed on their smart phones, and on the situation of the Shanghai Stock Exchange. I was astonished by the hypocrisy as the ones who had just complained about economic crisis and bank manager salaries now proudly boasted that „their money is working for them“. Could that be the Chinese dream – Money for nothing and chicks for free?

According to economist Charles P. Kindleberger and Hyman P. Minsky, most speculative stock market bubbles follow a similar pattern of five stages (source: investopedia.com):

1. Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low.

2. Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.

3. Euphoria: During this phase, caution is thrown to the wind, as asset prices skyrocket. The “greater fool” theory plays out everywhere. Valuations reach extreme levels during this phase.
   

4. Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health, because, as Keynes put it, "the markets can stay irrational longer than you can stay solvent." Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again.
   

5. Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.

So, when a common guard told me that he invested a year’s salary in the stock market, I knew that something bad was going to happen. That was in June. He suggested me to invest too, but I am real economy person, I’d rather buy 10000 pencils and store them in my closet than investing in stock. Now the guard has lost a lot of money and I am torn between compassion and Schadenfreude.

However, we shouldn’t be too pessimistic. Every crisis bears opportunities. When a journalist once asked the great Egyptian actor Omar Sharif, who died yesterday at the age of 83, why he played in so many movies, he answered: “I used to gamble quite a bit, and then I was always broke. I was always one film behind my debts.“

Further reading: Charles P. Kindleberg, Manias, Panics, and Crashes, 1978.