Irrational Exuberance Revisited

Let’s start with Warren Buffett, who said in 1999: “Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks.”

In other words—watch out when making money feels too easy. That’s often when the market stops running on fundamentals and starts running on something more dangerous: momentum and emotion. Buffett’s quote, “Be fearful when others are greedy and greedy when others are fearful,” will go down in Wall Street lore.

Buffett was, of course, speaking of “irrational exuberance,” a phrase not attributed to him but just as iconic. During the bull markets of the 1980s and 1990s, phrases like Buffett’s “Be fearful…”, Alan Greenspan’s “irrational exuberance,” and even Gordon Gekko’s “Greed is good” weren’t just Wall Street catchphrases—they were part of the culture.

It was December 1996, while he was still Federal Reserve Chairman,  that Dr. Greenspan asked the now-famous question: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?”

At the time, those words rattled markets. Stocks wobbled for a moment but quickly soared higher—until, of course, the dot-com bubble the spring of 2000 reminded everyone exactly what he meant.

Fast forward a bit, and I found myself working alongside the very man who introduced “irrational exuberance” into our vocabulary: Alan Greenspan.

Advisors Capital Management’s Senior Economic Advisor, Alan Greenspan with Partner Kevin Kern in Washington DC during 2017 planning session.

When Greenspan later served as our Senior Economic Advisor at Advisors Capital Management, his insights drove home a lesson that still guides the firm today: markets aren’t just about earnings reports, interest rates, or balance sheets. They’re about people—their hopes, fears, and sometimes their overconfidence.

That’s what makes “irrational exuberance” such a powerful reminder. Markets can be perfectly rational one day and completely emotional the next. The trick is recognizing when the crowd has stopped investing and started chasing.

It would be unfair to claim that today’s market run is comparable to the dot com era.  While our current stock market valuations are very high historically, they are not uniformly more extreme than the dot-com peak.  Today’s market is different with fewer speculative start-ups, more dominant, profitable tech giants with actual revenues.

If I remember correctly, there were not many fearful in the winter of 1999 while today I can find one or two fearful investors for every greedy investor. However, I am reminded that “History doesn’t repeat itself, but it often rhymes.” -Mark Twain

So, we need to stay disciplined. Diversify. Stick to fundamentals. And resist the urge to follow the herd when things start to feel too good to be true.  Yes, Gordon Gekko might have declared “Greed is good.” But Greenspan and Buffett remind us that unchecked “exuberance” is when caution matters most.

At ACM Wealth, we build diversified portfolios that can help keep you invested and prepared to handle both sides of the market—the optimism and the pessimism. Because over the long run, discipline and prudence, not exuberance, are what really win.

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