Burton Malkiel quote (and reading history)

"It is very difficult to be neutral about things so difficult to forecast as the future earnings prospects of corporations (or other investors' hopes and fears). Moreover, there are styles and fashions in investors' evaluations of securities. As I shall indicate in Chapter 5, this extreme overreaction to growth stocks following the collapse of the Nifty Fifty in the 1970s has created excellent opportunities for investors in the 1980s.

The Practical Theories for Investors

This chapter began with a description of the firm-foundation theory of stock values which indicated that "fundamental" considerations such as earnings and growth do influence the prices of common stocks. There is a yardstick for value, but we have seen that it is a most flexible and undependable instrument. To change the metaphor, stock prices are in a sense anchored to certain "fundamentals" but the anchor is easily pulled up and then dropped in another place. For the standards of value, we have found, are not the fixed and immutable standards that characterize the laws of physics, but rather the more flexible and fickle relationships that are consistent with a marketplace heavily influenced by mass psychology.

Not only does the market change the values it puts on the various fundamental determinants of stock prices, but the most important of these fundamentals are themselves liable to change depending on the state of market psychology. Stocks are bought on expectations--not on facts. Future earnings growth is not easily estimated, even by market professionals. In times of great optimism it is very easy for investors to convince themselves that their favorite corporations can enjoy substantial and persistent growth over an extended period of time. By raising his estimates of growth, even the most sober firm-foundation theorist can convince himself to pay any price whatever for a share.

During periods of extreme pessimism, many security analysts will not project any growth that is not "visible" to them over the very short run and hence will estimate only the most modest of growth rates for the corporations they follow. But if expected growth rates themselves and the price the market is willing to pay for this growth can both change rapidly on the basis of market psychology, then it is clear that the concept of a firm intrinsic value for shares must be an elusive will-o'-the-wisp. As an old Wall Street proverb runs: No price is too high for a bull or too low for a bear.

Dreams of castles in the air, of getting rich quick, do play a role--at times a dominant one--in determining actual stock prices. In this chapter I have documented several examples from both the distant and the recent past. Why are memories so short? Why do speculative crazes seem so isolated from the lessons of history? I have no apt answer to offer, but I am convinced that Bernard Baruch was correct in suggesting that a study of these events can help equip investors for survival. The consistent losers in the market, from my personal experience, are those who are unable to resist being swept up in some kind of tulip-bulb craze. It is not hard, really, to make money in the market. What is hard is to avoid the alluring temptation to throw money away on short, get-rich-quick speculative binges.

And yet the melody lingers on. While common stocks are virtually ignored, gold has recently been advancing toward $1000 an ounce. At the end of the 1970s, eager real estate speculators in places like California were turning properties around with profits of 25 percent in a matter of days. The notion is always the same: there will always be some greater fool to pay an even greater price. Will the music stop again?

Markets, whether for common stocks, real properties, or precious metals, will not be a perpetual tulip-bulb craze. The existence of some generally accepted principles of valuation does serve as a kind of balance wheel. For the castle-in-the-air investor might well consider that if prices get too far out of line with normal valuation standards, the average opinion may soon expect that others will anticipate a reaction. There is, after all, a firm foundation of value, albeit a very loose and flexible one. Sooner or later, however, all skyrocketing investments must measure up to this basic foundation of value. The ability to avoid being swept up in some frenzy of speculative enthusiasm is probably the most important factor in preserving the real value of one's capital and allowing it to grow. The lesson is so obvious and yet so easy to ignore."