With the strong 9% rise in the S&P 500 in the fourth quarter and the 31.5% return for the year, the dismal fourth quarter a year ago all but faded from memory. Indeed, from the perspective of the strong performance of the last ten years, any bouts of weakness look more like uninteresting footnotes rather than important premonitions.
There are reasons for investors to be on alert, however. Two phenomena, in the forms of continued implementation of ultra-loose monetary policy by all major central banks and the migration from active to passive management have coincided with this span of strong performance. While many commentators argue that these forces are benign, there is no doubt that they affect the way investors interact with the economic landscape and with each other. In order to make an objective assessment, it helps to look elsewhere for clues.
As it happens, another venue in which people regularly interact with their environment and with each other is in traffic. Tom Vanderbilt's book, Traffic: Why We Drive the Way We Do (and What It Says About Us), reveals some fascinating insights into these interactions that also prove surprisingly useful in the context of investing.
One regards the concept of safety. The conventional approach to safety has focused on engineering design so as to "compensate for the driving errors [the driver] will eventually make." The case of T-intersections provides an excellent example:
"Engineers use the factor of driver reaction time to determine what the appropriate sight distance should be—that is, the point at which the driver should have a clear view of the intersection. The sight distance is typically made longer than needed, to accommodate drivers with the slowest reaction times (e.g., the elderly)."
This practice, however, creates very long sight distances. Younger people (and those with faster reactions) can, and do, safely disregard the extremely conservative sight distances and slow down when they decide they need to. In other words, the intended safety precautions get "consumed"; the road is no safer than it would have been without the safety engineering. This phenomenon is also observed at railroad crossings:
"Railroad crossings where the sight distance is restricted—that is, where you can see less of the track and the oncoming train—do not have higher crash rates than those with better views."