I’ve lived through (and been schooled by) several significant cycles during my years as an investor. And yet, when I was about two-thirds of the way through writing my last book, a question dawned on me that I hadn’t considered before: why do we have cycles?
After pondering this question for a while, I landed on what I consider the explanation: excesses and corrections. If the stock market were a machine, it might be reasonable to expect it to perform consistently over time. Instead, the substantial influence of psychology on investors’ decision-making largely explains the market’s gyrations.
Everyone knows — or should know — that parabolic stock market advances are generally followed by declines of 20-50 per cent. Yet those advances occur and recur, abetted by the willing suspension of disbelief.