The Pendulum of confidence (believed truth) is an interesting way of perceiving the general tone of prevailing emotions, in our case for the world of investing.
The pendulum swings from left to right, farthest left being total pessimism and farthest right being absolute optimism.
In 2007 before the meltdown the pendulum was far to the right and then, only months later, after the crash almost all the way to the left.
In reality it can only have been the perception of truth, as the reality was equally or actually more dire before than after. So the reality is not therefore the key ingredient, it is instead belief and confidence that matter.
If one therefore accepts that belief is central to human motivation for action, it follows that the greater the consensus of optimism the greater the risk for subsequent loss; as Buffett says, “a high price indeed is paid for the perceived certainty of positive outcomes”.
The stock market rise over the last 4 years has been historic in proportion but interestingly it has occurred against the backdrop of pronounced scepticism; many investors not believing it safe to re engage with risk assets and keeping to the sidelines whilst markets have climbed.
Even now the rally is mistrusted, the pendulum being at best mildly to the right of centre.
This lack of confidence from an investor’s standpoint is a positive; perversely the paucity of consensual belief creating opportunity as doubt is reductive to asset values making them therefore better value.
We are today far removed from the time of greatest pessimism (and therefore greatest investment opportunity) but we are not in euphoric territory by any means.
Values are fair (ish) with some sectors above fair value and some below but in aggregate values are about average, when measured historically.
This is therefore the more normalised push (good news) and pull (bad) state that constitutes an average market, going forward economies will recover and profits will increase (the push) and when they do, central bank accommodation will lessen and interest rates rise (the pull).
It is helpful to look at multi decade graphs of market performance to observe that as time elongates the mountains and craters of what appear to be momentous movements over short periods, come to resemble mere mole hills and pot holes.
Human beliefs change to accommodate desires whilst core values remain constant; consensus if very bullish creates a mismatch between the upside which is believed in and therefore “in the price “, and the downside which has been discounted, this state is akin to placing bets with increasingly poor odds again and again until the perceived certain outcome does not occur and the bet (and the money) is lost.
The Pendulum of confidence is therefore a valuable indicator which gives clarity to emotional states, highlighting that a consensual perception can create the illusion of reality just as a widely accepted belief can give the illusion of a value. Those that seek truth do so for many reasons, but an investor’s motivation is that ultimately truth prevails and illusions often prove ruinously costly.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.