Robert Kiyosaki - Rich Dad, Poor Dad

MANAGING AN UPTREND

The inventory manager of a large soybean crusher is responsible for maintaining a 30-day inventory of beans. The inventory manager's annual bonus is based on the profitability of the operation. For the sake of profitability, the inventory manager must time bean buying carefully.

Harvest is now over. The seasonal trend is up, and the South American crop is in trouble. Each time the manager goes into the market, the price is higher. Faced with this prospect, most inventory managers begin to build inventory. Each purchase becomes a little larger. What does this do to the uptrend? It causes the trend to move sharply higher. As prices begin to skyrocket, everyone panics. Herd psychology takes over. The buyers buy at any price. The sellers hold the product off the market because they think it will be more valu­able tomorrow. The poor inventory manager fears being completely shut out of the market and out of inventory.

At some point prices become ridiculous—$13 per bushel. The manager of the soybean processing plant instructs the inventory manager to quit buying. Prices are too high to process the beans and generate a profit. It makes more sense to shut down the plant.

About the same time, the sellers realize they have a windfall and begin to send raw materials into the cash market. Shorts in the futures markets take delivery, thus squeezing the cash market even more. Then sellers begin to fear they are going to totally miss the boat. This causes them to sell as fast as they can, which drives prices down—just when the buyers have backed off. This behavior helps explain why markets tend to top with sharp peaks and fall twice as fast as they rise.

Jim Cramers Real Money Sane Investing In An Insane World Cramer