I’ve posted Entry #350 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Where Greenspan Went Wrong in Doubting His Ability to Contain Irrational Exuberance.
Juicy Excerpt: Red lights deliver warnings to drivers not to proceed into an intersection because there is a good chance that cars will be speeding through the intersection from the other direction at the same time. Say that research showed that, out of every eight times that a driver elects to ignore a red light and continue blithely into the intersection, he ends up in a car accident in only three of them. Would any reasonable person conclude that that evidence offers a good case for ignoring traffic lights?
Greenspan is a very smart man. I am of roughly average intelligence. It took me all of five minutes to develop this rejoinder to the Greenspan observation after I was reminded of it by an article on him that I recently happened to come across while investigating an unrelated subject. My rejoinder is easy to understand. I don’t think that the claim that I am making about traffic lights would inspire even a tiny bit of controversy if I offered it in any context other than a discussion of Greenspan’s decision to let the irrational exuberance of 1996 get even more out of hand in the years that followed. Yet, in the investing context, my claim is controversial indeed.