In the markets, being certain can be more dangerous than being wrong. The latter can be fixed by exiting the position. Being certain means you know you don’t need to exit…because there’s nothing to worry about.

Every ten or fifteen years, the market settles into a story about how the world works. The story is built out of the recent past where whatever’s been happening gets projected forward forever. During a bull market, the market feels the good times won’t end. In a bear market, good times are never coming back. Both feel logical because, well, just look! Echo-chambers and daily observation reinforce that the story is correct.

The moment risk is highest isn’t when people are afraid or greedy. It’s when they can no longer imagine a future that looks different from the present. And by “risk”, I mean both risk of loss of capital and loss of opportunity.

A few pictures help make the point.

America, 1972

For twenty-five years after WW2, American stocks mostly went up. In November 1972, the Dow closed above 1,000 for the first time. Wall Street behaved like it just broke the four-minute mile. All the sudden, 12-24 month price targets of 1,200 and 1,300 were being thrown out there.

The feeling was that the market had reached a new and permanent altitude. A whole generation learned that buying America was the right thing to do.

Then the 1973–74 bear market cut it nearly in half. Prevalent at the time was the oil embargo, inflation and Watergate. After the crash came something maybe even more painful — nothing. It would be a full decade, until 1982, before the Dow reclaimed 1,000 for good and this was only a nominal victory. When you factor in the decade’s savage inflation, stocks didn’t recover their real value until the mid-1990s.

A buy-and-hold investor from that 1972 celebration waited more than two decades just to break even in real terms. How quickly things can change. The post-WW2 joyride became a 20-year pain party.

But just because stocks suffered, didn’t mean there wasn’t opportunity elsewhere. There absolutely was. To no surprise, the assets nobody wanted in 1972 became the next decade’s big winners. Gold, freed from its fixed price in 1971, ran from $35 an ounce to $850; oil, farmland and commodities across the board went vertical.

Japan, 1989

If 1972 was confidence, 1989 was worship.

Japan had the largest stock market on earth. Serious people declared that the twenty-first century would belong to Japan. Eight of the ten most valuable companies in the world were Japanese. The grounds of the Imperial Palace in Tokyo were reportedly worth more than all of California. Smart people actually said and believed this.

The Nikkei peaked in late-December 1989 then fell more than 80%, grinding lower for almost 19 years before it finally bottomed in October 2008. It took another 15+ years to reach those highs in February 2024. That’s 34 years total. Thirty four. Three four.

The twenty-first century, as it turned out, did not belong to Japan.

And again, it’s important to not only consider the actual losses of the Nikkei but the opportunity costs of not participating in the major trends that occurred over this period, especially during the 19-year grind down into the depths of the drawdown. From a trend-following perspective, the best opportunities of this time were in metals, fixed income and petroleum markets.

America, 2000

By now you know the shape. Only the story changes. And many of you are familiar with this one either from firsthand experience or you’ve studied up on it.

This time it was the internet — a “new economy” where profits were optional and the old rules supposedly didn’t apply. Right. The Nasdaq climbed nearly 600% in five years and peaked in March 2000. Companies with no earnings bought Super Bowl ads while investors bid up anything with a “.com” attached to it. FOMO, greed and envy of the highest order.

Then it fell ~80%. It took 15 years, until 2015, to get back to those old highs. Most of the era’s darlings never came back at all. Pets.com went from IPO to liquidation in nine months. Webvan burned through nearly a billion dollars and vanished in two years. WorldCom collapsed into the largest bankruptcy in U.S. history. Even the survivors got hammered. Cisco, briefly the most valuable company on earth, lost almost 90% and wouldn’t reclaim its 2000 high for two decades; Amazon fell 95%.