Published on 27, Jan 2023

Shaunak Misra of Dumont Global Points to History for Valuable Investment Lessons

New York based investment fund, Dumont Global recently welcomed its newest partner, Shaunak Misra. Serving as both partner and senior analyst, Misra will be focusing on research for Dumont’s orphaned assets strategy. Formerly a senior analyst at SoftBank Asia Investment Fund (SAIF Partners), where he led public and private investments across consumer, financials, and technology, Misra holds an MBA from Columbia University and is a Chartered Financial Analyst® (CFA®) charter holder.

Misra says that he graduated business school into a very hot market. “Pandemic-induced stimulus had dramatically increased liquidity in the market,” he shares, “and most of my friends had started dabbling in options trading. For a period of time, it seemed surreal – can stocks only go one direction?”

Options trading is buying or selling options contracts, which are agreements giving the holder the option to buy or sell a collection of underlying securities at a set price by a particular date. As the market hit new highs, Misra turned to history to guide his decision making and he was reminded of several key lessons.

First, he emphasizes that the chief feature of a speculative episode is the development of something seemingly new and desirable – tulips in Holland, gold in Louisiana, dotcom during early 2000s, real estate and mortgage-backed securities (MBS) during the global financial crisis (GFC), and special purpose acquisition companies (SPAC) and cryptocurrency (bitcoin et al) during the current paradigm.

Second, he points to two types of participants in economic bubbles, a term that refers to an economic cycle characterized by a rapid escalation in market value, especially in the price of certain assets. The types of participants are:

• Those who are persuaded that some new price-enhancing circumstance is in control and they expect the market to stay up and go up indefinitely.
• Those who perceive or believe themselves to perceive the speculative mood of the moment - essentially, they feel that they can get out at the right time.

Third, both these types of participants are programmed for sudden efforts at escape. So, the unwinding of this bubble should be swift and dramatic. For example, let’s go back to the example of the "tulipmania" which affected Holland in the 17th century. An increased demand for tulip bulbs caused a huge surge in the market, across all classes, reaching its height in late 1636 and early 1637, after the prized bulbs had already been planted for a spring bloom. Certain types of tulips were more desirable and people actually mortgaged their homes to purchase them, with the hopes of profiting from resale.

What actually happened was that these purchases were purely speculative, made by people who had never even seen the bulbs. Investors lost confidence in the market, possibly because of an outbreak of bubonic plague that occurred in Haarlem, drawing attention away from a tulip auction. In any event, the market crashed and the bubble popped almost overnight.

The fourth historical lesson that Misra shares is that those who are saved from these market crashes are required to resist two very compelling forces: powerful personal interest that develops in the euphoric belief; and pressure of public and seemingly superior financial opinion that is brought to bear on behalf of such belief. Misra uses the term euphoria as it pertains to the top of an investment cycle, which, according to investor psychology studies, is usually a prelude to the market’s downturn.

For example, with tulipmania, those who had no personal interest in the flowers may have been less motivated to jump on the tulip bandwagon, and were saved financial destruction when the bubble burst; in the same vein, those who resisted peer pressure to invest astronomical amounts of money in tulip bulbs were also saved from financial ruin.

Fifth, Misra points out that when people do achieve wealth, they push against the idea that their newfound riches are fortuitous or undeserved. They wish to think their new wealth is because of their superior ability/insight/intuition. For example, in 1929, Paul M. Warburg (an eminent banker and founding parent of the Federal Reserve) warned of a bubble and the public claimed that he was "sandbagging American prosperity". Similarly, Roger Babson made a forecast of a crash in 1929 and was dismissed by famed economists such as Irving Fisher.

And lastly, Misra states that two factors contribute to investment euphoria: the brevity of financial memory and specious association of money and intelligence. Per the first, people tend to forget financial disasters as a society, and the next generation gains confidence in a particular market without paying attention to the past; and per the second, people tend to associate wealth with higher intelligence and ignore the role of chance.

Misra considered all these historic lessons in thinking about the current environment, and came to the conclusion that while the timing of the unwind was impossible to predict, Dumont’s belief in the unsustainability of the current euphoria was strong and the team decided to use that insight to manage their portfolio risk, which has worked out well for the company.

Website: https://dumontglobal.com/

Contact: sm@dumontglobal.com