When the market collapsed, Rothschild proceeded to buy quietly, so quietly that no one knew he was buying. Of course, the news from Waterloo arrived and the market perked up but by then, Rothschild owned huge chunks of valuable securities bought at fire-sale prices.
Most investing is like that -- the fundamentals of the stock help but an understanding of crowds helps even more. Crucial is an understanding of how the crowd will react to something. Rothschild, a few hundred years ago, had the luxury of being able to tune the crowd's mood to his needs. But even now, a sane investor who can divine the extent of a crowd's madness stands to make a lot of money. Last week, I found that I was not quite up to it.
I bought stock in Ciena corporation, a telecom chip company, when it seemed that the crowd hadn't yet woken up to the promise of the company's profitability. Less than three weeks after I bought it, amid growing realization of the company's superior technology, the stock went up 30%. I sold it, as the crowd had swung to the other extreme, discounting the threat from larger and smarter competitors -- Lucent and Japan's NEC. I should have waited. The crowd was willing to pay 50% more than I paid for it, even in the face of evidence that the company was going to issue more shares, that insiders were selling, that Lucent was going to enter the field and that there were only two customers.
Even insane crowds are made up of individuals. I sold to the first stream, the guys willing to pay $39 for the stock. The last stream of "investors" was willing to pay $46 for the same shares. I sold to the first stream, not recognizing that there were more salivating individuals lurking behind them.
