All: 100 for those who hope to live by investing

Author: (Japanese) Shin Yaguchi
Publisher:
Publish Date: 2006-03-01
Features: Even small amounts of money can cause market fluctuations. Generally speaking, things that seem unreasonable are difficult to last. The success of large stock trades seems to be due to the presence of flawed but convincing reasons. If not, it would be hard to imagine how such large transactions could be completed. It should be understood that the market rises not because of transaction A, but as a result of transaction A. In this case, the market only needs an upward momentum. Even without buying A, one might buy B or C instead. What proves rationality is that it doesn’t take large sums of money to cause market fluctuations. After 2000, U.S. stocks fell sharply, and before that, the ratio of credit transactions had reached its highest level since Black Monday in 1987. At that time, sell transactions could succeed even with small amounts of money. Because in such cases, a certain degree of price decline would be accompanied by selling pressure from credit transactions. In other words, if the market declines by a certain margin, many investors would be unable to pay margin calls, leading to successive sell-offs and a sharp market decline.
Let’s assume a scenario where there are 100 investors but only 80 goods. Initially, these goods possess the charm of financial instruments—when relatively cheap, their prices rise steadily. Even if the first buyers are arbitrage sellers, new buyers may appear immediately. With continuous buying, as their prices become relatively higher compared to other goods and market conditions, they may rise further due to expectations of continued price increases. Because the buyers are making profits, everyone rushes to buy. However, when their prices become relatively higher compared to other goods, the costs of buying and holding the goods begin to mount. The lenders (buyers of stocks and bonds) bear the credit risk of the issuing entity on one hand, while also being responsible for paying interest to the borrowers, placing them in a very awkward position. However, the allure of rising stock prices often makes investors lose their sense of calm and overlook the fact that investments involve certain costs. They start to feel anxious about missing out on this opportunity.
Let’s assume the number of investors increases to 120, while the number of goods decreases to 60 for some reason. In this case, the rising prices not only enhance the feeling that their prices are relatively higher compared to other goods but also indicate an increase in costs. If this continues, the market will not only fail to attract new participants but also see investors who have lost their stamina withdraw one after another. As the magic of rising prices fades, goods with relatively higher prices will decline, and the market will begin to fall. In such cases, the larger the borrowing balance, the faster the decline.
P4-P5