There are heroes and victims in every cycle of investing. Bull markets tend to draw in the hopeful, greedy, unsuspecting, and uninformed — and so too this post-Covid boom. Millions of first-timers have entered markets since 2020, not knowing anything else. History, however, and human nature, dictate otherwise. Like Howard Marks of Oaktree Capital, who has made the argument forcefully, markets don’t behave like rational calculators but psychological pendulums that move from hope to fear. Embracing this pendulum psychology can protect investors from surprises by their emotional extremes.

The Rush of Retail Participation and Misconceptions of Permanence

The Covid-19 pandemic not only changed medicine and supply chains—it also democratized investing. Low rates, digital channels, and lockdown time brought a generation of youth to capital markets. To this generation, corrections were simply temporary falls in what seemed like an endless upmove for markets.

Yet such sustained periods of euphoria tend to lead to distorted expectations. A 10% fall in benchmark indexes such as the Nifty 50 is only considered a return to the long-term average price-to-earnings (P/E) multiple of some 20. But individual shares can have a different story. Tata Motors lost half of its value. Infosys fell by over 30%. This difference between benchmark strength and sectoral or stock-specific falls demonstrates that sentiment, not valuation, often dictates short-term prices.

Psychology Overrules Valuation in the Short Term

Howard Marks, in his highly quoted 1991 memorandum, compared market action to pendulum motion: “While the center of the arc most accurately defines the point at which the pendulum lies on average, it only spends an extremely short time there. Rather, it is constantly in motion swinging to, from, or through the extremes of its arc.”

The statement encapsulates an important truth — markets rarely stay in ‘fair value.’ Euphoric or not, not often do investors trade in balance. It’s human emotion that drives the plunge to extremes — followed by the return. On just three trading sessions in early 2022, $6 trillion from US markets was erased only for $2 trillion to be returned in minutes by a false media headline, illustrating just how susceptible and reactive sentiment can be.

So dramatic fluctuations in price don’t make any sense in an earnings or discounted cash flows world. But it does make sense in an expectations, fear, and herd mentality world.

The evidence: Valuation versus Reality

Indian markets themselves offer strong evidence of the pendulum effect. The Nifty 50’s average P/E may be 20, but in reality, it has lingered there for only brief moments over the past decade. According to Motilal Oswal Securities, the index’s valuation ranged from a low of 16 times earnings during the Covid crash to a high of 25 times in 2019. Clearly, investors spend more time being overly fearful or overly exuberant than being “rational.” This difference between intrinsic value and market price is not weakness—it’s strength. As Marks wrote, “it is the movement toward an extreme that provides the energy for the swing back.” This cyclical process is not abstract philosophy; it works. Chasing markets at their euphoric highs risks capital destruction. Panicked selling at times of fear means that you’ll be missing out on the eventual bounce.

Current geopolitical and economic shocks: Catalyst for sentiment change

Macro drivers are also dictating the swing of this pendulum. Take, for example, the revival of protectionist policies by previous US President Donald Trump, who made threats of even tougher tariffs on China. These cues are an absolute contrast to that wave of globalization that underpinned previous market upswings. Combined with rising interest rates, de-globalization threats, and high inflation, these are exact ingredients for a shift from positivity to pessimism.

Global markets today, including that of India, show a complicated blend of firm corporate earnings and underlying apprehension. Information spreads instantaneously today, but investor sentiment is quickly shattered. “Investor psychology tends to spend a lot more time at extremes than at a comfortable medium,” Marks wrote.

Implications for Investors: Take Heed of History, Avoid Extremes

What can be done by investors?

  • Recognize Emotional Patterns: Realizing that markets are founded on psychology enables avoiding emotion-driven decisions made in times of highs or lows.
  • Respect valuations, but provide context: Don’t buy blindly just because an asset’s price fell 30%. Ask yourself, why did it fall? Fundamentals or sentiment?
  • Remain Disciplined and Diversified: We get tempted to double up in bull markets, and we get tempted to run in bear markets. A diversified, disciplined approach insulates us from both.
  • Listen to the Memos: Marks’ writings across the decades, from his Most Important Thing to his occasional memos on investing, all reinforce over again cycles, psychology, and prudence. Investors should take heed.

Markets aren’t rational either, nor are we. The investor sentiment pendulum, which first swings in one direction in an era of unbridled greed, then swings wildly back in fear, has cycled markets for generations, and so will it go on. Knowing this isn’t an argument against investing, but a reminder to make an educated choice. Howard Marks’ eternal wisdom serves to remind us that surviving in investing is not avoiding cycles but appreciating where we are in them — and responding appropriately. It is high time today’s investor, especially the novice caught up in the post-Covid rebound, learns that markets may go up and down, but human psychology causes them to go swinging.

Dr. Prahlada N.B
MBBS (JJMMC), MS (PGIMER, Chandigarh). 
MBA in Healthcare & Hospital Management (BITS, Pilani), 
Postgraduate Certificate in Technology Leadership and Innovation (MIT, USA)
Executive Programme in Strategic Management (IIM, Lucknow)
Senior Management Programme in Healthcare Management (IIM, Kozhikode)
Advanced Certificate in AI for Digital Health and Imaging Program (IISc, Bengaluru). 

Senior Professor and former Head, 
Department of ENT-Head & Neck Surgery, Skull Base Surgery, Cochlear Implant Surgery. 
Basaveshwara Medical College & Hospital, Chitradurga, Karnataka, India. 

My Vision: I don’t want to be a genius.  I want to be a person with a bundle of experience. 

My Mission: Help others achieve their life’s objectives in my presence or absence!

My Values:  Creating value for others. 

References:

  • https://economictimes.indiatimes.com/prime/money-and-markets/why-investors-must-keep-in-mind-marks-pendulum-psychology-of-markets/primearticleshow/120087813.cms
  • Marks H. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. Columbia University Press; 2011.
  • Oaktree Capital Management. Howard Marks Memos. https://www.oaktreecapital.com
  • Motilal Oswal Securities. India Strategy Reports – Historical P/E Trends; 2023.
  • Shiller RJ. Irrational Exuberance. Princeton University Press; 2000.

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