Great Galbraith quote mentioned in Howard Marks’ new memo:
“Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor 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. (John Kenneth Galbraith, A Short History of Financial Euphoria, 1990)”
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I just read his latest memo and also found his last line really interesting:
And, as a reminder, since the major ups and downs of the markets are primarily driven by psychology, it’s clear that market movements can only be predicted, if ever, when prices are at absurd highs or lows
So this kind of implies that we should only act based on market movements if it’s absurdly high or low? Otherwise, I guess investing in solid businesses at reasonable prices is a better default strategy.
And, as a reminder, since the major ups and downs of the markets are primarily driven by psychology,
it’s clear that market movements can only be predicted, if ever, when prices are at absurd highs or lows
…
So this kind of implies that we should only act based on market movements if it’s absurdly high or low?
I don’t think it means that–there are lots of ways to act rationally based on market movements.
It just means that one should not place weight on predictions of price direction at times prices are neither absurdly high nor low.
You can invest very well without predicting the next direction of price movements.
As you note, buy solid businesses at reasonable prices, then wait.
Moments of extreme cheapness, in particular, tend to be followed by price increases that are generally strong, prompt, and pretty predictable.
The rest of the time, future price movements (on the order of a year, say) are largely unpredictable and valuation levels aren’t a useful input.
FWIW, and yet–
One of the very few metrics that I know of that has historically had some meaningful predictive power at a time frame of around a year is quite bullish right now.
Its current reading has historically been associated with the subsequent year returning around 13-15% for the average US large cap.
Kind of surprising to me. I don’t make that prediction, I merely I offer the information for your entertainment.
Jim
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