If we put a frog into tepid water, and then start to heat it up slowly, the frog will jump out. It will not get boiled as the saying goes. However, as a market analogy it's accurate. People will sit with their positions until the bitter end, especially if the decline is a drawn out affair. But this behaviour is not primarily due to complacency. Rather, it's based in a lack of strategy. With no clear idea of relative prices, one bet is as good as another. People with this attitude will hold onto their position for ever, no matter what.
This is rewarded in prolonged bull trends, such as the one we've seen in the US since 1980. Doing nothing but adding to stock positions has been a winning strategy. Every drop in stock prices have been opportunities to buy more. As a result, we have a lot of frogs basking in the hot waters of overpriced equities. Not a single frog has noticed that gold has been a better investment since year 2000. They are still sitting in the pool, delighting in ever-new record highs in nominal terms and unaware that prices are going down relative to gold.
This trend is likely to continue for several years to come, and I expect the frogs to remain in the stock market pool. They will continue to think that they are getting richer, while in reality they are getting poorer. Only too late will they realize that they were in the wrong pool.
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| A frog sitting on the handle of a saucepan |
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