The majority of strategists and advisors who believe the ‘market is a discounting mechanism’ axiom can be compared to car drivers who navigate their way by looking in the rear view mirror. If the markets are consistent in at least one facet, it is they always take the long and winding road. When a majority of drivers peer into their rearview mirror and reflect on how lovely the drive has been, they won’t notice their car has left the road until it is airborne and in free fall. Of course, the opposite occurs at market bottoms. Drivers only see potholes and ditches in the rearview mirror, and feel as if they’ve been driving in the Baja 500 without shock absorbers forever. At every market top and bottom, the market is wrong. Not convinced? Just ask all those folks who bought condos in Florida, Nevada, and Arizona in 2006! For all our intelligence, we humans are too often induced to become herded by the newest craze, or an investment that seems to offer a sure fire path to riches. Whenever a herd mentality takes over, i.e. technology stocks in 2000 or housing in 2006, separating from the crowd is really difficult. But that’s what makes contrary opinion, one of the more powerful investment tools, and far more valuable than believing the market is a discounting mechanism.
