André Kostolany—The "Master and Dog" Theory: Solving the Mystery of Soaring Stocks in a Shaky Economy

In the current market, investors are suffering from a severe case of cognitive dissonance. The morning news warns of looming recession risks, sticky inflation, and geopolitical tension; yet, open your trading app, and AI stocks are hitting all-time highs while crypto parties like it's 2021. This phenomenon—"cold economic data, hot financial markets"—makes fundamental investors question their sanity: Is the market crazy, or am I?

To solve this puzzle, we don't need complex econometric models. We need the wisdom of a man who understood human nature and liquidity better than anyone: André Kostolany, the "Grandmaster of the Stock Exchange." Having survived two World Wars, three bankruptcies, and countless booms and busts, Kostolany offers a sharp, witty, and crucial lesson: The stock market rarely follows the logic of an economics textbook.

The Economy and the Market: The Dog and the Master

"The relationship between the economy and the stock market is like a man walking his dog," Kostolany famously quipped. The man (the economy) walks steadily forward. The dog (the stock market) runs ahead, lags behind, chases butterflies, and runs back. The dog may be far ahead or far behind, but ultimately, it is tethered to the master and will always return to him.

Analysis and Application

This metaphor perfectly explains the current disconnect in global markets.

• The Phenomenon: Why are stocks rallying when the economy feels "meh"? Because the "dog" got bored of the slow walk and, excited by the scent of AI, sprinted far ahead. This doesn't mean the "master" (GDP growth) has sped up; he might even be slowing down.

• The Lesson: Investors shouldn't be afraid to enter the market just because economic data is lackluster, as the market prices in the future. However, the critical danger is forgetting the leash. When the dog runs too far ahead of the master (extreme valuations), a snap-back is inevitable. If you buy when the dog is furthest ahead (maximum greed), you risk a painful correction even if the economy keeps growing, simply because the dog needs to wait for the master to catch up.

Kostolany teaches us not to predict tomorrow's stock price using today's GDP, but to measure the distance between the dog and the master.

The Only Formula for a Bull Market: Money + Psychology = Trend

Kostolany's explanation for market movements is brutally simple. He believed that P/E ratios and earnings don't drive trends; two things do: Liquidity (Money) and Public Sentiment (Psychology). He distilled this into a legendary formula: Trend = Money + Psychology.

Analysis and Application

• Money (Liquidity): This is the oxygen. Even if fundamentals are mediocre, if the market is awash in cash (e.g., from massive ETF inflows or lingering stimulus), stocks will rise.

• Psychology (Imagination): This is the spark. The narrative of AI changing the world creates the willingness to pay higher multiples for that liquidity.

Applying to the AI Bubble: The current market is a textbook example of "Money (still plentiful despite rates) + Psychology (AI euphoria)." This explains why unprofitable AI startups can command billion-dollar valuations. But Kostolany warns: "If the people with money have no stocks, and the people with stocks have no money, the trend ends." Investors must watch these variables like a hawk. If central banks drain liquidity (Money vanishes) or the AI narrative hits a snag (Psychology vanishes), the trend will reverse instantly.

Who Holds the Chips? The Egg and the "Firm Hands"

How do you know if we are at the start of a boom or the eve of a crash? Kostolany proposed his famous "Kostolany's Egg" model, dividing investors into two camps:

1. The Firm Hands (The Investors): They have money, patience, and ideas. They buy when the market is crashing and sell when it is booming.

2. The Weak Hands (The Gamblers): They have no money, no patience, and follow the herd. They buy when the market is hot and panic-sell when it drops.

Analysis and Application

The "Egg" describes the cycle:

• Correction Phase (Bottom): Only the Firm Hands are buying. Volume is low.

• Adjustment Phase (Rising): The Weak Hands start to notice the trend. Buying increases.

• Exaggeration Phase (Top): The Weak Hands rush in blindly (FOMO). Volume is massive. The Firm Hands are quietly selling their shares to the Weak Hands.

Practical Diagnosis: Look at Reddit, FinTok, or your local chat groups. are they full of people asking "Is it too late to buy Nvidia?" or "How do I use leverage?" If your friend who never cared about stocks is suddenly giving you stock tips, this is the Exaggeration Phase. It means the chips (stocks) have transferred from the Firm Hands to the Weak Hands. When every Weak Hand has bought in, there is no one left to push prices higher. A crash requires only a pinprick.

Conclusion: Be a Contrarian "Firm Hand"

André Kostolany's wisdom is a sedative for today's market anxiety. He teaches us that market irrationality is normal, but it follows a pattern. In an age of AI hype and information overload, we don't need more data; we need more character. Understand the "Master and Dog" to ignore short-term noise; watch the "Money + Psychology" equation to gauge the trend; and use the "Egg" to know who is holding the cards. Ultimately, victory in the market belongs to the "Firm Hands"—those who can think independently and have the patience to wait while the "Weak Hands" panic.