Article: Here’s the Thing About Irrational Exuberance – By Adam O’Dell
Harry Dent is truly an “outside-the-box,” “big picture” thinker.
He’s fiercely independent.
He’s the ultimate contrarian.
And he tells it like it is – good, bad, or ugly.
I’ve been Harry’s “right hand” investment guy for six years now and many people say we’re the perfect complement to each other.
Harry’s expertise is in long-term cycles, many of which are predetermined by demographics and the predictable decisions people make during the various stages of our lives. And he’s honed the uncanny ability to see things that everyone else is blind to, often well in advance.
My expertise is in actionable investment strategies – ones that take advantage of investors’ irrational decision-making processes, particularly in the short run.
And that’s where there’s a sublime overlap in Harry’s and my work. I’m a student of what’s called “behavioral finance.” But nobody understands human psychology, and therefore investor psychology, as well as Harry does.
Consider Harry’s description of how people very irrationally deny the natural “ups and downs” of life. It’s one of my favorite “Harry-isms.”
He says, and I’m paraphrasing here…
“Everybody expects life to get easier all the time. We just want to get better… and better… and better… and better… and better… and then go to heaven… and STAY THERE!”
I love that. It’s so true!
But that’s not reality, is it?!
Life is full of ups and downs. And so too are the markets – even if the last several years have felt like an easy, one-way ride to heaven.
And that’s why Harry and I work so hard to arm our readers with knowledge and strategies for both sides of the financial market rollercoaster.
The best way to describe Harry’s and my unique and complementary approaches comes from the legendary father of value investing, and Warren Buffett’s mentor, Benjamin Graham.
Like Harry and me, Graham was well aware that the irrationality factor routinely drives market prices far too high… and far too low… than is justified by the intrinsic value of companies.
Graham’s famous saying goes…
“In the short run, the market is a voting machine. But in the long run, it’s a weighing machine.”
Given enough time and sufficient rationality, market participants will “weigh” the value of a company and subsequently adjust the market price of its shares (through buying and selling) until the value of the shares equals the value of the company.
That’s the longer-term, “weighing machine” function of the market.
And very often, when Harry is seeing things in the economy and markets far ahead of everyone else… he’s anticipating the day when the weighing machine is properly balanced – even when it’ll take an unimaginably nasty crash to get there.
So, while starry-eyed investors extrapolate the recent past and see “heaven forever,” Harry stays committed to telling it like it is.
The other side of the Benjamin Graham’s maxim speaks to financial markets’ function in the short run. He appropriately describes it as a voting machine because, in the short term, the price of a financial market is largely determined by how popular it is – as irrational as that sounds.
Investors vote with their dollars… buying stocks when they feel good and selling stocks when they feel scared.
People are more irrational than we’d like to admit. And in the short term, the popular vote can change rapidly and often. It can also become very one-sided – owed to our irrational “herding” behavior – which can push the prices of financial markets far beyond their intrinsic values.
That’s when you get the “irrational exuberance” that former Federal Reserve chair Alan Greenspan first referred to in December of 1996.
And here’s the thing…
You can’t simply dismiss or thumb your nose at irrational exuberance… just because it’s irrational. As perverse as it seems, irrationality is a real force that has a very real effect on the performance of real investors.
Consider how long the stock market remained “irrational” between Greenspan’s calling it that and the final peak of the dot.com bubble: 39 months!
That’s a long time!
Eventually, of course, the long-term “weighing machine” function of the market worked properly. By 2002, technology companies were trading at prices that more appropriately reflected their intrinsic values.
But in 1995… and 1996… and 1997… and 1998… and 1999…
Well, that’s when the short-term “voting machine” function of the market was dominant… as “irrational” as it now appears with the benefit of hindsight.
So, what’s a prudent investor to do in situations like these?
We’re now a full eight years and counting into the “most-hated bull market ever.”
Should you sell?
Should you buy?
There’s no simple answer, of course.
Harry remains adamant that his forecast will come to pass. He’s created a video to explain why. This will air on Wednesday, October 25.
Between Harry’s long-term cycles and visionary contrarianism… and my actionable, shorter-term focus… we believe we’re the perfect pair to guide you through the volatile ups and downs ahead.
Editor, Cycle 9 Alert
Follow me on Twitter @InvestWithAdam