If we have learned anything from the great crashes of 1929, 2001 and 2008/09, it is that investorscan come to think of themselves as being invincible
With apologies to Charles Dickens, his novel about an English orphan who rises to wealth, deserts his friends, and ultimately becomes humbled by his hubris and arrogance might one day double as a plot summary for what has been going on in the bull market that started in late 2022.
In other words, the real question is: Can it be rational to have irrationally great expectations? The behavioural finance concept of a “greater fool” suggests that it may be rational to buy assets that are expensive if you are confident there is a greater fool out there somewhere who will nonetheless buy your asset at a higher price still . This trend can continue for a long time, but it cannot last indefinitely. To quote Keynes: “Markets can remain irrational longer than you can remain solvent.
Walter Gretzky is said to have advised his son Wayne: “Skate to where the puck is going, not to where it is.” That thinking explains much of economic forecasting and personal investing. As long as markets continue to rise – and as long as people continue to expect them to rise – there’s often a handsome reward for having a bullish disposition. People will ride the bull and smugly think themselves to be shrewd for doing so.
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