December 20, 2018

Do You Believe In Magic | RIA

David Robertson asks us if we believe in Magic. What he really means is that stock prices do not always align with underlying fundamentals. This is the lesson of some of the great financial crashes. Despite all the evidence that the fundamentals do not justify the price, people continue to believe in what the price appears to be saying. But these are illusions. Market strength creates the illusion of strong fundamentals, because people wrongly see the former as a product of the latter. But this is not reality.

Key Takeaways:

  • Stories are conjured about more than just exciting new stocks and industries, and sometimes they define a narrative about the economy or the market as a whole.
  • A discrepancy between real growth and perceived growth arises, and often the whole story is more complicated and less alluring than the headlines of ‘blockchain’ or ‘cannabis’.
  • Charlie Munger coined the term ‘febezzle,’ or ‘functionally equivalent bezzle,’ to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

“One of the great lessons of history is that it is not so much periodic downturns that can cause problems for long term investment plans so much as it is specious beliefs about supporting fundamentals that can really wreak havoc. Often, we have decent information in front of us but we get distracted and focus on, and believe, something else.”

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