Bubbles and Panics Eventually End

Sep 2008 //
History
Economics
Behavioral Finance
Bubbles

Although psychologists say it’s human nature to extrapolate the immediate past, I hope investors resist that urge, because history is clear that both bubbles and panics ultimately—and irresistibly— are drawn back toward economic reality.  And reality has been that for over 100 years, long-term economic growth has continued within sustainable limits, driven by advances in science, technology, innovation, entre­preneurship, risk-taking, capital (equipment) formation and freedom.  Nuclear Armageddon or other draconian scenarios notwithstanding, the smart bet remains on economic progress. 

 

In our judgment, recent market declines have been caused not so much by corresponding declines in worldwide economies as by today’s panicky crisis of confidence, brought about in part by some legitimate economic concerns, cheerleading by self-interested parties, a sensationalist press, and the political process. If history is any guide, our economic problems will be resolved (though not overnight).  . . . Unlike the overall economy, stock prices can move quite rapidly over the short term, so when an upturn begins, it could be dramatic.