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Monkeys and Goats: Important stock market lessons

Earlier, there was a story published on this website about ‘Monkey and the Stock Market story‘.

The popular story now has a new twist and a new addition.

A goat joins the monkey to give you very important stock market lessons.

Do read the article till the end.

Stock Market Lessons - Monkeys and Goats

The Monkey Scam

A rich man from the city once arrived in a village. He told the villagers he would buy monkeys for ₹ 100 each.

The villagers were super happy. After all, there were many monkeys in the forest nearby.

They caught hold of the Monkeys, sold it to the rich man.

When the number of monkeys in the forest began to reduce, the rich man offered ₹ 200 per monkey.

The villagers couldn’t believe their luck. They set traps and caught the monkeys and got them to the rich man.

A few days later, the rich man announced he would pay ₹ 300 per monkey.

The villagers began climbing trees and risking their lives to catch monkeys and get them to the rich man. He happily bought them all.

Soon, there were no more monkeys left in the forest. Sensing this, the rich man said he needs more monkeys. He would pay ₹ 800 for each monkey.

The villagers couldn’t believe this. They badly wanted more monkeys, but couldn’t find them.

A few days later, the rich man announced that he had to get back to his city for some work and his manager would deal on his behalf.

After he left, the villagers were unhappy. They were earning money quite easily from selling monkeys, but the forest no longer had monkeys.

This is when the manager stepped in and gave the villagers a fantastic offer.

Pointing out to the monkeys that were caged by the rich man, the manager told the villagers, he would sell the monkeys for ₹ 400 each.

“Sell them back to the rich man at ₹ 800 when he comes back” the manager said.

The villagers were delighted. Buy for 400 and sell for 800 in few days. They had just found the easiest way to double their money.

The villagers broke their deposit boxes, removed their savings and even borrowed money.

There were long queues and within a few hours, almost all the monkeys were sold out.

Unfortunately, their happiness did not last long, as the manager went missing the next day and the rich man never came back.

The Goat Scam

The rich man who had successfully managed to cheat the villagers, was greedy for more.

He went to another village. This village didn’t have a forest with monkeys, but the rich man noticed the villagers had lots of goats.

Since the goats gave milk and was useful for other things, the rich man knew he wouldn’t get them for cheap.

He announced he would buy the goats for ₹ 2000 each.

Some villagers were happy with the offer and sold their goats.

Later, he raised the offer to ₹ 3000 each. The villagers who were unhappy with the first deal of ₹ 2000, were happy now and sold their goats.

Now that there were no goats left in the village, the rich man tried the same old trick.

He announced he wanted more goats and was willing to pay ₹ 5000 for it.

And since he had to go back to his city, he appointed his manager to finalize the deals.

The villagers wanted to earn. Some of them also wanted goats for milk and other purposes.

The manager stepped in and offered to sell the goats which were purchased from the villagers for ₹ 4000. He told them they could sell it back to the rich man for ₹ 5000.

The villagers accepted the deal, broke their savings and bought the goats back.

Both the manager and the rich man were never seen again.

Goat vs Monkey

The way the rich man cheated the villagers was the same in both the Monkey and Goat story.

But there’s a big difference.

In the first village, once the rich man and his manager left, the monkeys began to trouble the villagers. They would make noise, steal the food and were of no use. A few days later, the villagers had to leave the monkeys back into the forest.

Things were different in the second village. They were pained by the loss of money, but the goats were still useful. They gave milk. Their dung could be used as fertilizer. And when the goats got old, their meat could be consumed.

In short, the goat had value while the monkeys were useless.

So what’s the stock market lesson from the story?

Stock Market Lesson No 1

If you haven’t figured out already. The Monkeys are low-quality shares which greedy investors buy when the stock price is rising.

The goats are quality companies, which many investors buy out of greed during a roaring bull market.

The price of quality companies might drop during a bear market, but eventually if the company is good and the business is growing – the stock price will rise.

In case of low quality or fraud companies, the losses are permanent – much like the monkeys in the story.

Stock Market Lesson No 2

Those who were in the market during the ‘mid and small cap’ bull run in 2016 – 2017 will understand this better.

There comes a time in the market when the monkeys will be made to look more valuable than the goats.

In other words, the lower quality companies will be more talked about and everyone would be buying them. Both in business channels as well as Whatsapp groups and Moneycontrol forums.

It happened in 2017 and it happened in 2007 too.

Even experts were recommending companies like Sintex Plastics, GVK Power, Sanwaria Consumer, PC Jewellers, Kwality, Manpasand Beverages, Vakrangee etc.

The list was endless. While no one was talking about stocks like Reliance, Nestle or Bajaj Finance – everyone was talking about unknown micro-caps!

It made sense too. The price of some of these monkeys were going up by 5-10% every single day. While those of goats were rising by less than 1%.

People were making quick money from thrash. And situations like these, do come at the peak of a bull market.

I remember a share called ‘Vikas Ecotech’, which was quoting at 50 PE and analysts were giving bigger targets. Some of these monkeys with manipulated balance sheets, were twice more expensive than a Bajaj Finance.

The result was in front of all of us. Check out the price of any of the monkeys mentioned in the article. Those who invested when they were at their peak, will permanently lose their money.

Quality companies will bounce back. So even if you make the mistake of buying them at high valuations, there will be pain of temporary loss in the short term – but chances of permanent loss is less. Just like the goats in the story.

Keep an open eye. There will come a time when the price of monkeys will once again overtake the goats. Resist the temptation to buy them. Do your research very carefully, because monkeys will be made to look like goats.

Learn to differentiate the goats from the monkeys the stock market. This will help you save a lot of money in the long run.

For experienced investors, who have seen the previous market cycles: when everyone is buying and recommending monkeys – it could be time to book some profit and hold cash, because the top of the market could be very near.

We hope you enjoyed this article. If you have any questions, post them in the comments section below.

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