Hussman's Weekly Market Commentary - Thinking About Risk
Hussman Funds - Weekly Market Comment: March 20, 2006 - Everything Looks Good at the Top of the Channel:
"There's a quaint idea that has emerged in analyst talk these days, which basically goes - concerns about valuations, the current account deficit and other things aren't really important, because everyone has already looked at them, and markets don't usually respond to things that investors have already considered.
It's a nice idea, but it's preposterously wrong. It isn't the mere consideration of a risk that makes it benign. Rather, risks become benign only when investors have already acted on them. Anyone who remembers the 2000 market peak (from which, as it happens, the S&P 500 has still earned a zero total return after 6 years) will recall that rich valuations were very well recognized, but investors suspended or delayed acting on those valuations by reducing their speculation. For a known risk to become benign, you have to act on it and price it in. It's not automatic. Thought is not action.
Simply put, the main risks to the market generally are ones that investors have considered, but are also ones that they have not acted on. If you're a window-washer and know that your platform is slippery, thinking about it isn't enough to eliminate the risk. What makes the risk benign is that you tie a rope around your waist. The fact that investors have considered valuations, the current account deficit, and other matters doesn't in the least make those risks less important, because investors have not acted on those risks in any meaningful way."