Markets are not a linear ascent; they are a perpetual drama of booms and busts, driven by the ebb and flow of collective psychology. Warren Buffett and Charlie Munger frequently alluded to these limits, with Munger stating, "People who expect perpetual growth in real wealth in a finite earth are either mad men or economists". This wisdom stands in stark contrast to periods of "speculation" when "blind capital... is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is 'speculation'; it is devoured, and there is 'panic'".
We often see these cycles play out in vivid, sometimes comical, fashion. Remember the "Bored Ape Yacht Club. WTF was that?" or the more recent "Hawk Tuah meme coin crash of 2024"?. These fads highlight Benjamin Graham's observation that "The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some 'action' in progress". The "big money in booms is always made first by the public - on paper. And it remains on paper". Current market observations, such as "higher stock valuations despite higher rates," suggest an "odd combination" not seen in previous tightening cycles, raising questions about sustainability. Even the whimsical notion of "Nvidia purses" can be a "humorous, albeit concerning, observation on the signs of market exuberance and mania".
Navigating this cyclical drama requires a healthy skepticism toward claims of perpetual novelty. As Sir John Templeton noted, while "20 percent of the time things really are" different, the challenge lies in discerning those genuine shifts from fleeting narratives. The key is to avoid "loss of focus" and to "sit and think," rather than being swayed by the crowd. This prudent approach allows investors to apply a "margin of safety," acknowledging that "no matter how wonderful [a business] is, it's not worth an infinite price".
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