markets
The Pendulum of Mood
The rule
The market's mood swings like a pendulum between greed and fear. It almost never rests at the sensible middle, so expect the swing back.
Where it flips
Believing 'it always swings back' can trap you into holding a truly broken company, waiting for a bounce that never comes. The fix is to first check that the business itself is sound, and only then treat the mood as temporary.
The 'right' price for a share is a calm, boring middle number, but the market rarely sits there. It swings from wild hope, where every story is believed, to deep gloom, where nothing feels safe. It passes through the fair middle only on the way to the next extreme. If you know which mood you are living in, you stop mistaking a swing for a new forever-truth, and you start expecting the return trip.
A worked example
In a hot bull run Rohan sees a mid-cap priced at 60 times its earnings, and everyone calls it 'the future'. Eighteen months later, in the gloom, the same business trades at 12 times, with better sales. The company barely changed; the mood did. [illustrative]
How to spot it
- ·'This time it's different' said with total confidence
- ·The same stock loved when high and hated when low
- ·No one can name a fair middle value
Howard Marks · The Most Important Thing