The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

The Family Investment Committee, Tomorrow

Like well-crafted riddles, capital markets events are usually perfectly comprehensible after the fact. But while they are happening there is so much “noise,” so much emotional resonance (and dissonance), that we can't make out what will later become clear. Most events in the markets, however important they may seem at the time, are merely noise, and attempting to act in reaction to them is a very sound way to reduce our wealth.

Thus, it was perfectly obvious in the late 1990s that equity valuations had become disconnected from reality. The “justifications” for those prices—it's a whole new paradigm; things are different this time—were specious on their face. But there was so much noise and confusion going on, and the short-term pain of missing out on the almost daily price appreciation was so much more intense than the longer-term prospect of a market crash, that perfectly sensible people continued to pay higher and higher prices for stocks that were pretty obviously (but retrospectively!) worth only a tiny fraction of those valuations.

Even events that are truly substantive are often not actionable in a way that will improve returns. The valuation disparity between growth and value stocks, for example, became compelling in the mid-1990s, but anyone who attempted to profit from that disparity was hammered by the continued, almost mystical, appreciation among growth and technology stocks. In other words, it is often possible to “know” that ...