Thursday, 16 April 2009

Circularity and risk

There is something rather circular about one bit of investor folklore which is usually called "the greater fool theory" and this often backs into a related matter of smart and dumb money. This circularity is especially the case if one equates risk with volatility and is considering relatively short term investment horizons.

The so called "smart money" maybe nothing other than those with the deepest pockets who can sustain periods of systemic illiquidity and wait for less volatile trading conditions to re-appear.

The ultimate market failure - a true systemic breakdown without a public sector safety net - would be when everybody becomes the "dumb money". Let's hope that that is not in our future.

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