When Markets Get Drunk—We Should Stay Sober
Let’s talk about it.
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Welcome to Rivers Investment Group, the paraclete of wealth management. I’m Danny Rivers, also known as Papa Bear—at least to the three most important people in the world, and of course, that’s been graciously extended to you as well! You can send questions to Ask Papa Bear at www.riversig.com.
It’s Friday morning, June 17, 2022. I’m really looking forward to watching those Arkansas Razorbacks tomorrow in the College World Series. How about those Omahogs? Woo Pig!
Markets tend to overreact. Sometimes, you could say the markets actually get drunk. And you know, people who get drunk—they get silly, we could call them happy drunks. Other folks, when they drink too much, get a little sad, maybe even depressed. It’s like that country music song:
“I drink because I’m lonesome, I’m lonesome because I drink.”
Markets are like that too. And since markets are made up of the public, maybe I should say the public gets drunk—gets far too optimistic. Alan Greenspan called it “irrational exuberance.”
Amateur investors and professional investors alike tend to extrapolate. They assume a rising market will always go up when they’re too happy—when they’re happy drunk. Investors also get too sad, too pessimistic, and think the trend will continue—that if the market’s going down, it’ll always keep going down.
When everyone else gets drunk, really, we should stay sober.
So many people have made this analogy: the stock market is drunken. Or, as Warren Buffett said, a “drunken psycho” who can never decide if he wants to be pessimistic or optimistic—but he’s always drunk one way or the other.
Let me show you an article I just ran across where Warren Buffett talks about the market being drunk. Here’s the article from Yahoo.com:
Mega investor Warren Buffett called the stock market a “drunken psycho,” with stocks having their worst start to a calendar year in history.
In the first eight days of [blank] year (I’ll tell you what that is in a minute), the S&P 500 fell 7.5%, the Dow fell 5.3%, and the Nasdaq fell 7.4%.
And yet, Buffett said, you can ignore that. You can ignore the stock market.
Let’s imagine there’s a person out there named Mr. Market, and he’s kind of a drunken psycho. Some days he gets very enthused; some days he gets very depressed. When he gets really enthused, you sell to him. If he gets really depressed, you buy from him. Emotions are contagious, and they have no place in investing.
Isn’t this interesting? Worst start to a calendar year in history—and this is the advice from Warren Buffett. Now, as Paul Harvey would say, here’s the rest of the story:
This article came from 2016. Yahoo.com, written by Jake Mann, January 14, 2016. In the first eight days of 2016, the S&P 500 fell 7.5%, the Dow fell 5%, and the Nasdaq fell 7%. And Mr. Buffett says: you can ignore that.
So, let’s say every day some drunk man comes by and offers to buy you out—your house, your car, maybe your investment account. If it’s a good offer, maybe you consider it. If it’s a bad offer, you just refuse it and go about your day. If this same drunk man comes by every day and offers you a lower and lower number, not only do you have the right to refuse it—you just ignore it. Just don’t pay any attention to it anymore.
So maybe, when the market has had too much of this, we should have some more of this. I wonder—just by the way—what would it be like if you mixed these two? I’ll let you know.
