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).