There are two insights from Benjamin Graham’s classic “Security Analysis” that I believe are appropriate to keep in mind today.
- “Putting excessive weight on recent past history, as opposed to a rational prior, is a common judgment error in psychological experiments and not just in the stock market.”
- “Investors may very well equate well-run companies with good investments.”
There is no doubt that we are living through a period of unusually high enthusiasm for investing right now. Based on the 20%+ gain in the S&P 500 in 2017, it would have been difficult to devise a diversified common stock portfolio last year that did not deliver at least double-digit annual returns.
As a result of these recent stellar returns, you are beginning to see extreme enthusiasm for investing in high-risk junk. If the media coverage of Bitcoin in recent months doesn’t strike you as a modern incarnation of what John Maynard Keynes meant when he spoke of “animal spirits”, what would?