Mass Psychology Supports the Pricey Stock Market
In an annual outlook piece on January 1, for example, described “fantastic illusions”
that were spurring “the most reckless stock market speculation.” The article said it was possible that, before long, “the bubble bursts.”
The notion that investors were laboring under “fantastic illusions” and had bid up prices to unsupportable levels appeared in many places.
The database also shows a sudden increase in 1928,
and again in 1929, of references to “tulipomania” — the bubble in tulip prices in Amsterdam that crashed in the 1630s.
After the ratio’s peak in 1929, real inflation-corrected stock prices in the United States
lost four-fifths of their value by 1932, the biggest crash in the market’s history.
When dot-com stock prices started to decline in 2000, people were already primed to
rethink their assumptions about the wisdom of holding shares in internet companies.
That was the observation of John Maynard Keynes, who suggested
that investors do not actually make money by picking the best companies, but by picking stocks that waves of other traders will want to buy.