The Triumph of Hope over Experience
The comments below are an edited and abridged synopsis of an article by Jesse Felder
“Marriage is the triumph of imagination over intelligence. Second marriage is the triumph of hope over experience,” said Oscar Wilde. Substitute “investing during a mania” for “marriage” in that quote, and you’ll understand what is going on in the stock market today.
Felder uses two Warren Buffett quotes to illustrate that investor expectations have soared far beyond any reasonable figure. US investors now believe they will achieve average annual returns after inflation of 17.5%, roughly in line with the most aggressive nominal return expectations seen at the peak of the dotcom mania. As a result, they’re pouring money into the equity market like never before. This, despite the fact that the Buffett Yardstick is off the top of the chart.
In fact, this measure crossed above the level where Buffett suggested investors were “playing with fire” years ago; it now stands more than 50% higher than its peak set in 2000, widely seen as the top of the greatest speculative mania in stock market history. However, if Buffett is right and “the price you pay determines your rate of return,” investors today are facing a much bleaker future than they were 20 years ago.
But they didn’t listen to Buffett back then, so why would they listen to him today?