Statisticians are reminding us that because the market has fallen for three years in a row, the likelihood of a further fall remains the same. It seems the mathematicians forgot one seriously important factor and that is that we are not talking about flies crawling up a wall and randomness but about shares which are actual businesses with underlying fundamental values.
The best analogy is to consider the “elastic” theory. According to the ferocity of the movement from our previous peak (or, indeed, from long-term norms), to suggest that the pressure applicable to that piece of elastic for each subsequent stretch is identical to previous behaviour is naive. This same theory explains why the piece of elastic has stretched so far below the norm this time – the rebound has come from a particularly heady level.
In conclusion, where major declines take place within a business model which makes sense at these levels when the fundamentals are reviewed (dividends, earnings, assets, and so on), then we are not playing roulette, once we remind ourselves of the divorce from short-term sentimental movements of human participants. We believe that the elastic is due for its bounce back the other way and potentially of a greater amount than the majority is prepared to expect at present.
Philip Milton Philip J Milton & Company,