Nothing in Excess

Despite “Surprising” Connotation, Many Market Crashes Forewarn Us of Their Arrival

By Anthony Rhodes

The mean is that area which resides equidistant between deficiency and excess. Occupancy within this region has been lauded by the great Greek philosophers as the ideal way to live life, while postulating that movement towards either end of this gauge creates an imbalance which is non-sustainable, and therefore should not be pursued. One of the chief duties of the Federal Open Market Committee is to enforce the mean through monetary policy. When the economy is growing too fast, they step in and raise interest rates, in an attempt to restore its balance, and when it’s moving too slowly, the lowering of such rates commences, in pursuit of the same objective.

Maintaining the mean becomes complicated when our perception of what constitutes excess, is clouded by our natural tendency to rationalize our desire for more. We’d like our companies to produce more growth, so that our portfolios can produce more money, and this wanting incrementally distorts our calculation of the mean, which unknowingly moves us further towards the excessive end of the gauge. This week, we’ll discuss how this distortion manifests itself through stock market crashes. At our conclusion, we’ll collectively come to the realization, that the often used wording of “surprising” or “shocking” crashes (which tend to associate themselves with these occurrences), might not be an apt description of these events, but that many, if not most, actually forewarn us of their arrival, and in some cases, for weeks, if not months, in advance.

The Incredible Phenomenon of Lying Numbers

Logically speaking, the best way to maintain the mean should be to simply rely on the numbers. After all, numbers are universally known for their impartiality and accuracy, and are credibly held as a dependable mechanism to offset our emotional penchants from interfering with our investigations. However, while numbers are known for their neutrality, human beings are not, and this incongruity can cause our biases to creep into our interpretations of numbers. Many scholars, who study the aftermath of market crashes, often find themselves scratching their heads as to why they weren’t avoided. Their post-examination of the numbers revealed, that the market was clearly on an unsustainable course, and that a simple analysis of said numbers, should have divulged this information for all to see.

"Irrational Exuberance"

 When times are good, we naturally expect those periods to continue. Our human proclivity for positive outcomes, tends to override our ability to judge events rationally, and this illusion unfortunately blinds us towards the possibility of those moments coming to an abrupt end. During such periods, our perception of the mean once again becomes distorted, as we march headlong towards the excessive end of the gauge. A continuing movement in this direction will inevitably result in an imbalance, and unfortunately, market corrections and or crashes, are predictably soon to follow.

Be it Socrates, Plato or Aristotle, the wisdom and guidance of the great philosophers continue to inform us of the monumental teachings which made the Hellenistic era one of histories’ most influential periods. Of the myriad of topics covered by these sages, perhaps the most poignant and longest standing, is the ideal way to navigate life, with the quote “Nothing in excess” serving as the bedrock of this particular pillar. Maintaining the mean authenticates this message, and informs us yet again, that the lessons of the past are transferable to the present. Also, that market corrections and crashes are the inevitable conclusion of moving beyond it, and appropriate justification for those who'd dare defy the wisdom of the Greats.   

(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective )