We’ve heard Warren Buffett continue to repeat an important phrase, “what the wise man does in the beginning, the fool does in the end.” This begs the question, when does a foregone conclusion become what we call “a well-known fact”? We thought today’s bifurcated stock market makes for a good time to analyze some crowded historical opinions in the U.S. stock market and compare them to those held today. We will do this while most market participants attempt to predict when the next major stock market decline is coming.
A foregone conclusion is a result predicted with certainty. We define a well-known fact as a body of economic information which has been widely disseminated and has been acted upon by almost everyone who could care to act. In effect, the wise man figures out the foregone conclusion earlier than other investors, but the fool piles into the foregone conclusion once it becomes a well-known fact.
Historical Foregone Conclusions Becoming Well Known Facts
After the end of World War II, the U.S. put a cap on long-term interest rates to give taxpayers time to pay back the debt incurred fighting war on two international fronts. The economy grew in the 1950s and 1960s as we witnessed a baby boom. It was a foregone conclusion that rates would rise after the controls came off. Wise investors avoided long-term bond investments, while stock market investors continued to buy because of leftover fears from the Great Depression. By 1981, five-year Treasury bonds were paying 15%.
Along the way in 1973, President Nixon put wage and price controls on the economy because it was a foregone conclusion that high levels of inflation were damaging economic growth. At that time, wise investors bought investments which would benefit from cost-push and demand-pull inflation. By 1980, we’d had double-digit inflation and almost everyone had their investments organized around un-ending high inflation levels, which were peaking around 11%. It was a “well known fact” in 1981 that high inflation and high interest rates were something we had to live with continually. Wise investors bought stocks which were depressed by those high interest rates and by how difficult it was to succeed in business as owners, while customers wrestled with exorbitant borrowing costs.