“There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”Article content
In market cycles, most excesses on the upside and the inevitable reactions to the downside are the result of exaggerated swings by the pendulum of psychology. Even Benjamin Graham, the father of value investing and Warren Buffett’s mentor, acknowledged the tremendous influence of psychology in his allegory about Mr. Market. Depending on his volatile mood swings, Mr. Market will buy assets at unrealistically high levels or sell them at bargain basement prices.
As the cycle progresses and markets begin to rise, investors are neither overly pessimistic nor blindly optimistic. People require adequate compensation for taking risk, valuations are neither depressed nor excessive, and you can expect returns that approximate the long-term historical average.