the Wealthy Canadian

Pop quiz; what does fractal geometry and the stock market have in common?

Answer; Benoit Mandlebrot. Mr Mandlebrot was a fractal geometrician who noticed patterns of change and dubbed them the Joseph and Noah effects.

The Joseph Effect describes persistence. Trends tend to persist. It is either feast or famine. A winning team continues to win and a rising stock will continue to rise.

The Noah Effect describes discontinuity. When a trend does change, it vanishes quickly. A hot and dry summer day is often followed very soon afterward by heavy a rainstorm. When that rising stock suddenly stops rising it will fall quickly.

The stock market is an emotional place filled with fear and greed. As the Canadian Capitalist points out in a recent blog (and Ben Graham said at one time;)), we are our own worst enemies. Consider Nortel; once the darling of Bay Street, it was in nearly every Canadians’ portfolio in some way. As the stock gained upward momentum in the late nineties more and more people piled in. A consistently rising stock looked too tempting to leave alone so more people bought pushing the price higher. However, once the tipping point was reached things quickly went south. Greed sent the stock to unreasonable valuations, and fear sent it crashing down (all right, in this case maybe poor management helped it along).

Whether you are a speculator or an investor, it is helpful to remember Joseph and Noah.