The Pendulum of Market Sentiments
Introduced by Howard Marks in 1991, the mood swings of the securities markets resemble the movement of a pendulum:
- While the midpoint describes the location of the pendulum on average, it spends little time in the middle
- Swinging too far from the middle will result in an inevitable movement in the other direction, often far towards the other extreme (Regression to the Mean
Investor psychology often swings quickly between euphoria and depression. The same goes for securities prices (being overpriced and underpriced).