By Dan Denning – Southbank Investment Daily (Great Britain) –
Markets aren’t people. But they are made up of people. And people are people. But how do you explain the difference in our behaviour as individuals versus our behaviour as a member of a crowd? Why would a rational investor understand that a stock trading at a price earnings multiple of 25 is historically expensive but buy it anyway?
The historical record shows that stocks spend a lot of time being overvalued. There must be a psychological force at play here. Maybe it’s as simple as the fact that if you weren’t an optimist, you wouldn’t get out of bed in the morning. It’s not that we’re resilient. It’s that if you didn’t think life were getting better, or you couldn’t make it better for you and your family, existence would be a pretty grim affair (nasty, brutish and short, even).
Maybe we have a “cognitive optimism bias” because it promotes our survival and reproduction. But is it enough to drive the FTSE to 8,000 in the second quarter? After the FTSE 15,000 forecast I published this weekend, a sceptical reader sent me an article from Interactive Investor with a much more modest forecast: FTSE 8,000. From the article: