Skepticism and Optimism in Markets

When it comes to markets, skepticism is warranted when optimism is excessive and optimism is warranted when skepticism is excessive.

Because the market moves in cycles, there will always be fluctuations and psychology overwhelms fundamentals in the short run. This creates opportunities for good deals if you can make the contrarian call correctly.

From Howard Marks' memo Taking the temperature.

See also:

  • Surprise Should Come from the Upside Case Only

    If your investments are good only because of future optimism, you will have surprises in the downside case. If your investments are good without optimism required then you will be surprised in the upside case.

  • What’s the Trade?

    When you see something absurd in the market, it’s helpful to ask, “What’s the trade?” How would you make money from it if it truly is absurd? Oftentimes, it’s not that straightforward and there is more to it than you think. This is a good check against biases and, if you truly believe that something is wrong, would you be willing to make the trade?