It's generally true that the higher
stock prices are, the more optimistic investors become, and the
lower prices are, the more pessimistic they become.
It can be difficult — even for the most
experienced investor — not to get caught up in the prevailing
enthusiasm or pessimism of the moment. Take for instance so-called
irrational exuberance — popularized by Fed Chairman Alan
Greenspan in his 1996 warning about the booming stock market —
which has come to characterize the unrealistic expectations of
many investors of the late 1990s.
Many individual and professional investors
came to count on 25% or higher annual returns on their investments
in the absence of company earnings, historical precedent, or any
economic indicators to warrant such optimism. Some market commentators
were even rewriting the rules for measuring the value of stocks,
saying the traditional wisdom for evaluating the soundness of
companies no longer applied.
The more cautious were vindicated when the
downturn in stock prices in 2000 and 2001 proved that company fundamentals — such as earnings, management, and the strength
of a company's product — not only mattered but had major
consequences on the markets.
Jeremy Siegel, The Wharton School
Jeremy Siegel of The Wharton School recalls other instances of irrational exuberance.
The bull market of the 1990s was not the first time
investors succumbed to the tantalizing notion that the rules of the game
had been rewritten to exclude failure. They did so in the 1920s, and in
the 1960s. In the 1980s, Japan served as the example. When the president
of the Chicago Mercantile Exchange, who was visiting on a business trip
in 1987, expressed amazement at the high valuation of Japanese securities,
his hosts replied, "You don't understand, we've moved to
an entirely new way of valuing stocks here in Japan." The TOPIX index
— the Japanese equivalent of the Dow Jones Industrial Average —
subsequently fell from over 2881 at the end of 1989 to 1722 at the end
of 1999, roughly a 40% drop.
Many individual and professional investors
came to count on 25% or higher annual returns on their investments
in the absence of company earnings, historical precedent, or any
economic indicators to warrant such optimism. Some market commentators
were even rewriting the rules for measuring the value of stocks,
saying the traditional wisdom for evaluating the soundness of
companies no longer applied. 
Jeremy Siegel, The Wharton School 