The Hindu Business Line : Ideavirus and market cycles

The stock market crashes in India almost every year. The pattern is the same. We hastily bid up asset prices to a point where valuations become stretched. Pessimists’ then enter and hammer prices down. How does this cycle occur? We turn to a concept called ‘ideavirus’ for an answer. What is it?

Seth Godin popularised the word and also wrote a book about it. An ideavirus is an idea that is contagious as a virus. Assume that your favourite sportsperson bleaches her hair orange. You will most likely bleach your hair too, as will her other fans. And soon, orange will become a fashionable hair colour.

Investing is also about ideas. You buy a stock because your broker tells you to. Your friend apes your action. And before long, your entire neighbourhood is loaded on the same stock!

But not all stocks go up. The reason is to do with the people who initially spread the ideavirus. Seth Godin calls them sneezers. Sneezers can be promiscuous sneezers or powerful sneezers.

Any stock broker could be a promiscuous sneezer. He spreads an ideavirus because it helps increase his income. A promiscuous sneezer can, therefore, be bought for a price.

A powerful sneezer cannot be bought. An ideavirus will spread fast if, say, Warren Buffett were to declare that Infosys is a good stock at the current price.

Asset prices typically go up due to promiscuous sneezers. Even if we know that the sneezer is motivated to spread the ideavirus, we buy the idea because we do not want to be left behind if the stock climbs up.

Then, economics takes over. As ideavirus spreads, demand picks up as does the stock price. That is what happened with Essar Oil and all other stocks.

But why did the market turn so viciously? Fear is more powerful than greed. So, the ideavirus from the pessimists spread faster than the ones from the optimists. That lopped off all our portfolio gains and some capital in the two days as most prices crashed 50 per cent.

The author is a Chennai-based investment strategist.

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