Crowd-Behavior Episodes
high confidence — compiled with source citation from the investment brain.
Crowd-Behavior Episodes
Crowd-Behavior Episodes
Bubbles and panics are the same phenomenon read in opposite directions: a crowd that first over-pays and then over-sells, with psychology — not fundamentals — driving both legs. howard-marks is the corpus's principal anatomist of this behavior, and his memos name the recurring parts so they can be recognized while they are happening rather than after.
The three stages
A bull market is not a percentage move but a sequence of beliefs. Marks states the classic division: "the three stages of a bull market" — "the first, when a few forward-looking people begin to believe things will get better," "the second, when most investors realize improvement is actually underway, and" "the third, when everyone concludes that things will get better forever." The third stage is the danger zone, and it is defined by what has vanished rather than what has appeared: "fear of missing out replaces fear of losing money."
The anatomy of excess
Marks's central explanation for why markets overshoot is the pairing of "excesses and corrections" — psychology drives prices above and then below value, and the two swings are symmetric. The behavior has a signature. One is the new, new thing, the innovation that justifies prices no history can check, and its attendant slogan — the four most dangerous words in investing, this time it's different — a line Marks attributes to John Templeton. Another is the deterioration of lending standards that marks every top — "the worst of loans are made in the best of times" — and the adage Marks calls his favorite on investor behavior: "What the wise man does in the beginning, the fool does in the end."
The forgetfulness is structural, not accidental. Marks quotes Galbraith on why: "The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten."
The seed and the panic
If bubbles are built by optimism compounding on itself, panics are triggered by something small — a seed — whose importance no one can measure in advance. Writing at the start of the 2007 credit unwind, Marks warns against the pretense of foresight: "It's folly to think we know in advance just what it is that will cause the market pendulum to stop swinging in one direction and start in the other." The seed itself was modest in scale relative to its effects: "The seed of the current cyclical downturn sprouted in the area of subprime mortgages."
What the episodes teach
The practical content of cycles is here: because the swings are psychological, they recur, and because they recur, the investor's edge is not prediction but temperament. The corpus's conclusion is that mr-market's moods are the mechanism by which episodes happen, and second-level-thinking is the only reliable countermeasure — recognizing that when a consensus has congealed around "forever," the expected value of joining it has already turned negative. See sea-change for the distinction Marks draws between a cyclical swing and a permanent break.
See also
Sources
howard-marks/Memos-Markdown/Bull Market Rhymes.mdhoward-marks/Memos-Markdown/2007-07-30 - It's All Good . . . Really.md