The Undercover Economist by Tim Harford

Author:Tim Harford [Harford, Tim]
Language: eng
Format: epub, mobi
Publisher: Oxford University Press, USA
Published: 2005-10-14T05:00:00+00:00

A modern day example is the “Grolsch” method of picking shares. I met an investor who told me he had bought lots of shares in the brewer, Grolsch, because he’d been to lots of parties around the City of London and Grolsch beer was being served at all of them. Other beers, which had previously been popular, like Stella Artois or Heineken, seemed to have disappeared from the scene. Naively, I told him that parties in the City weren’t necessarily a good indicator of Grolsch’s worldwide sales; Grolsch could be doing well in the City but badly everywhere else, in which case the company’s long-term profits would fall and buying the shares would have been a mistake. The investor told me that he knew that was true, but it didn’t matter. He reckoned that if Grolsch was big in the City, lots of City investors would figure it was made by a successful company and buy the share. The share price would go up—for a while—and he could sell at a profit. The fundamentals only mattered if he planned to hold the share for a long time, long enough for the real picture, whatever it was, to become clear. And what was the real picture? Over the next year, Grolsch shares fell by about a third from £24 to £17.5; they then bounced right back in just a couple of months. At the time of writing in March 2005, they are almost exactly where they were when we first had the conversation.

The Grolsch method is not interested in the value of the share. It’s simply an attempt to take advantage of what mistakes youthink other investors will make. Yet given what we now know about rational stock markets and the random walk, why would we expect investors to make such easily exploitable mistakes?

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