One has been intensely struck, twice in the last several months, by the extent to which the investing public responded in abject fear and massive panic liquidation to two perfectly ordinary, overdue, short-lived corrections.
In August 2015 and again this January-February – after very nearly four years without one – the S&P 500 experienced corrections about equal to the average intra-year drawdown since 1980. Yet you would have thought the world was ending – and many investors evidently did.
One wondered how this was possible. Did people really not know that great bull markets (like the current one) do not – because they cannot – end while the default setting of investor emotion is still existential terror? Secular bull markets end only in mania: a mindless new-era euphoria that knows no fear other than that everyone might be making more money than you are.
And one concludes: mania must have some kind of radioactive half-life; my guess is that it’s about fifteen years. In this theory, half of all today’s market participants have no memory whatever of the last mania. And the other half have either blocked it out or don’t think it’s relevant.
The fact is that the greatest stock market mania in American history – dwarfing by every conceivable metric the Roaring ‘20s – was the dot.com bubble. And we can date its bursting with great precision to one single event on one specific day. It was January 10, 2000, and on that day, AOL – the paragon of new media, and of all the Internet’s limitless potential – announced that it was acquiring Time Warner – as old media as any company extant – in the largest corporate merger in history up to that time.
In that very moment, it was over.
AOL had announced, so clearly that no one could possibly miss it: our growth rate is wholly unsustainable; therefore our price/earnings ratio is a lunatic fiction. So just before the carriage turns back into a pumpkin, and the liveried servants back into mice, let us use an unprecedented pile of this funny paper to buy something real.