Saturday, March 2, 2024

Rational Exuberance?

For those who are experienced in the markets, having that “every day is a Sunday” feeling shared by many spelt signs of a possible meltdown looming over the horizon. In other words, the deemed unrealistic feeling that things will keep going up is called “irrational exuberance”, a term made famous by the then Federal Reserve chairperson Alan Greenspan back in the mid-1990s when he was describing the internet bubble, which eventually popped.

Going by English definition, the roots of irrational are purely psychological and emotional, as opposed to rational where objectivity and fundamentals hold key. Throw in the word “exuberance” which means excitement and is already a mental state, we can see why irrational exuberance is something we need to be wary of when it reared its head in the markets.


Now back to the blog post title, are we able to have a thing called “rational exuberance”? It sounds paradoxical, as it implies getting excited while keeping a cool mind. Imagine standing next to your favourite idol and yet display a cool composure (i.e. no giggling or hands-on-the-head-with-mouth-open expression) while having a joint photo taken; to me, that is a form of rational exuberance.


Yes, you can have those moments of rational exuberance. Playing again by word meanings, we can devote our investment energy in an objective way. One example would be to calmly scout for bargains when the markets are down. Another is to average up a security when the price is going up and you can still calculate its potential of climbing further. In other words, do not be swept by the maddening crowd, but instead going enthusiastically and rationally along the right direction.

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