Though I disagree with George Santayana’s pragmatist philosophy, I couldn’t agree more with his remark that “Those who cannot remember the past are condemned to repeat it.” I have thus endeavored to become a student of stock market history to avoid the condemned thing.
Market history is boring and frustrating to think about for most, but I will try here to simplify it for you. Tell me how I do.
Stocks are priced, over time, relative to the earnings of underlying companies. Sometimes market participants are optimistic and willing to pay a lot for underlying earnings, sometimes they are pessimistic and willing to pay little, and most of the time they are somewhere in between.
- 20% of the time they are optimistic: happily accepting less than 4% annualized returns to buy stocks
- 15% of the time they are pessimistic: demanding 16% or greater returns to buy stocks
- 65% of the time they are in between: expecting something between 4% and 16% returns from stocks
Briefly, in March 2009, investors were pessimistic enough to demand 16% returns. At present, they are happily accepting less than 4% returns.
With that very brief and simplified market history, let me be bold now and predict the future. Please wait a second while I gaze into my crystal ball…
…I see people getting less than 4% returns in the future, I see them getting very pessimistic at times, very optimistic at others, and spending the majority of the time in between.
Okay, I don’t really have a crystal ball, but that’s what will happen if you invest in the market today. The past will repeat and those who haven’t learned will being doing the condemned thing.
Oh, and by the way, you don’t have to invest in the market. Instead, you can–right now–buy pessimistically priced companies and sell optimistically priced ones. That’s another lesson of market history, but it’s not as simple.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.