The Death of Investing?

What goes around comes around.

Mark Twain famously noted that history doesn’t repeat itself, but it often rhymes. That is, there are broad themes that tend to reoccur, often generationally. Investors often forget or ignore the past, so they have a habit of giving in to their emotions and believing the stories that get peddled by fear-mongers or hope-machines, extrapolating past trends and ignoring the likelihood of regression to the mean.

We won’t see another tech bubble again anytime soon: no online grocer is going to sell at 200 times earnings. But there’s sure to be another cycle, another bubble, and another crisis somewhere. There will be another time when people overpay for exciting investment ideas because their future appears boundless. Then, when the bubble bursts and fortunes are lost, there will be another time when people can only imagine further declines.

Recently a couple of professors published an article entitled, “Why Stocks are Riskier Than You Think.” They remind us that stocks are always risky. As a result, the longer you hold stocks, the better your chances of getting wiped out by some unforeseen disaster. But the longer you do anything the more likely it is that something bad will happening. The question isn’t whether something bad can happen, but the likelihood of loss overall, considering good times as well as bad.

This kind of pain extrapolation is what drives markets higher. When people see no upside to the future, there is no optimism to evaporate from stock prices, and when the world doesn’t end stock prices melt up. That’s why a 30-year bull run followed the Business Week issue on “The Death of Equities.”

The irony is that the extrapolator thinks he’s respecting history when he’s repeating it. Martin Luther wrote that if he knew the world was ending tomorrow, he’d still plant a tree today. Luther was wise. Investors should be, too.

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