Human history is a series of overcorrections.
I remember in Driver’s Ed, they talked constantly about the danger of running off the road. The peril had nothing to do with hazards lingering on the right shoulder, but instead in the reflex that causes most people to overcorrect and swerve into oncoming traffic.
This reflex is nothing new. In fact, it’s plagued the human race for ages.
We overcorrect in our presidential elections. How else could you explain a country electing George W. Bush, followed by Barack Obama, followed by Donald Trump?
We overcorrect during midterm elections. The party of the presidential victor usually does well in Congressional races when the president is elected because of the coattail effect. But then the sitting president almost always sees his party lose seats in Congress during his first midterm election, as the electorate feels the need to overcorrect from their choices just a couple of years earlier.
We overcorrect in world conflicts. After getting their spiky helmets kicked in by Napoleon and the French Empire for most of the 19th century, the Germans sat and stewed for decades before finally getting their act together in 1871 when they kicked the crêpes out of the French in the Franco-Prussian war. The French then let their resentment against Germany smolder for decades until they eventually goaded the Russians into aggressions that marked the beginning of hostilities that led to World War I.
After Germany was defeated again in World War I, the French and their smoldering resentment led the way in crafting a peace agreement so punitive to the Germans that it once again created strong feelings of resentment and nationalism throughout Germany, paving the way for Hitler and the National Socialist German Workers’ Party, which eventually led to an ethnic genocide and a second world war.
Napoleon died in 1821, but the rippling effect of constant overcorrections that followed his reign led to a global war more 120 years after his death.
We overcorrect in matters of racial interaction. A country that once allowed slavery swings the pendulum in the other direction after the Civil War with Reconstruction policies that render southern states politically irrelevant at the national level for years to come. From that came southern resentment, which gave us the KKK and Jim Crow laws as a measure of overcorrection.
The same racial overcorrections exist in modern society, where culture initially goes to the extreme with political correctness and protection of minority interests, eventually leading to an extreme overcorrection that looks like a group of white guys in their mid-20s trying to frame themselves as society’s new victim class as they march through Charlottesville with their Tiki torches, Nazi flags, and very small chance of ever making love to a woman.
So if we tend to overcorrect in all areas of society, wouldn’t it make sense that we do the same thing with our investing? Of course it does, and that’s exactly what happens during bull markets and bear markets.
When the market is rising, investor confidence swells, which means more and more money goes into the market. At some point during that ride to the top, we cross a line where almost all of the money coming in is being invested for emotional reasons, not based on a rational assessment of P/E ratios or the general health of the economy. Very few people pay attention to those metrics during an upward overcorrection.
But as soon as one catastrophic event changes everyone’s mood, suddenly the downward overcorrection in upon us. Stocks fall, and rightly so, because they were overpriced to begin with. But the fall ends up being much more precipitous that it would be if everyone was acting rationally. But instead of rational behavior, a 10% drop causes panic which creates even more sellers than we had the day before, which leads to a 20% drop, which causes even more panic and the next thing you know, we’re down 50%. What should have probably been a 10% correction is instead a gargantuan overcorrection.
And so the cycle goes on, decade after decade, generation after generation.
So what’s our lesson in all of this? Well, the lesson for society as a whole is that life would be better for all of us if we merely corrected our behavior instead of vastly overcorrecting. But you can bet that society will never learn that lesson. So the lesson for you as an individual is to remember that overcorrection is apparently the natural human instinct and you should keep that in mind as you shuffle around this mortal coil.
Control your own behavior when you can—by not steering into oncoming traffic after you accidentally drive off the road, and by not moving to Montana to live in a tent and join a militia because you’re upset about the PC culture that dictates that kids in preschool now have to sit “criss-cross applesauce” instead of “Indian style.”
And in the areas of life where your well-being isn’t completely controlled by your own behavior (like your exposure to stock market risk), keep in mind the way that society tends to behave and position yourself accordingly so that you’ll be prepared when history repeats itself again.
Human history is a series of overcorrections.