“The pendulum never stops……”
Occasionally, something we hear sticks in our minds and stays with us.
When I was in business school in the 1970s, my finance prof used a phrase that I often find useful in conversation with clients and investors – especially in markets such as we’re in today.
That phrase: “The pendulum never stops in the middle.”
My finance professor was one of the big names in the field – he consulted with many of the Wall Street firms and was frequently quoted in the press.
He used this phrase in the context of market valuations and market sentiment. He talked about the historical reality that markets inevitably swing from one extreme to another, from periods of outlandishly elevated valuations to ridiculously beaten down levels, from periods of unquestioning euphoria to absolute pessimism.
“The pendulum never stops in the middle” applies in lots of other cases as well.
Look at the market’s and media’s attitude to risk and leverage – a year ago companies that used insufficient leverage to boost profits were punished for being “dull and boring”, today even prudent risk has become a dirty word. (The most popular article in the online New York Times last week was a piece laying out Canadian banks as the model for the global banking system – a notion that six months ago would have been completely absurd.)
Consider investors’ attitudes to owning resource stocks – where not long ago loading up on these was all that many investors wanted to talk about, today they don’t even want to hear about owning resources.
This is also reflected in expectations on oil prices. A year ago, the “peak oil” theory held sway and demand from China and India was going to push oil to $200 by year end. Today we’ve begun to hear about the “peak demand theory”, the view that demand for oil peaked last year and we’ll never, ever see demand at that level again.
Recall all the investment fads and “flavour of the day” investments.
And think about the wild swing in consumer sentiment on appropriate spending that’s taken place in the last little while- from the norm of lavish expenditure to “the new frugality.”
The key point that my finance prof made was that while the stock market may be efficient and rational in the mid and long term, in the near term the “swinging of the pendulum” creates terrific opportunities for companies and for investors who can maintain their perspective.
That was true thirty years ago … and it’s arguably even truer today
So when talking to investors who are spooked by recent events and dire economic forecasts, consider talking about the fact that “the pendulum never stops in the middle”.
We may not be all the way to the extreme of despair and pessimism, but we are almost certainly well past the mid point – and into the area that we’ll look back on years from now and recognize that the drastic shift in sentiment has created significant value for those bold enough to look past the swinging of the pendulum and recognize it.
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March 6th, 2009 at 1:48 pm
[...] have to credit Dan Richards for this insight and point readers to his blog on the topic this week. While Richards’ audience is primarily Canada’s financial advisors, the insights are [...]