As Ben Graham pointed out in 1959, the typical experience of the speculator is one of temporary profit followed by ultimate loss. Yet, those who buy corporate securities without regard for valuation are speculating, whether they know it or not.
Another generation is learning old lessons the hard way; see How Millennial Investors lost Millions on Bill Ackman’s SPAC.
And it’s not about a lack of smarts; in fact, intelligent, educated people are just as prone to classic errors of over-confidence and reckless ‘investment’ choices:
“Just because I have specialized training doesn’t mean I can’t be just as much of a fool as the guy next door.”
Also, read the very lucid The Critical Importance of Confidence Diversification to Today’s Investment Portfolios:
It is very rare to see the kind of extreme confidence we have today in so many financial assets at once. Moreover, it is a potentially precarious situation. Overconfidence is inherently fragile, and, looking at most portfolios, there are few holdings with low or uncorrelated sentiment to buffer losses should confidence soon drop. When it comes to mood, portfolios are woefully unbalanced. Not only is everything is on the same side of the sentiment ship, but extremely so.
While investors are now debating what might happen to future asset prices because of macroeconomic forces like inflation and growth, I think they are focused on the wrong risks. What will drive prices ahead will be a function of what happens to the synchronous euphoria now present in what were once confidence-uncorrelated markets. Given the collective extreme in confidence, if sentiment drops, it is likely that all asset prices will fall sharply in unison. Investors won’t reap the benefits of diversification they believe they have in their portfolios.
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