From the book "The Intelligent Investor" by Benjamin Graham:

“The pendulum swings from irrational exuberance to unjustifiable pessimism.”

Looking at the S&P500 index currently nearing 3,000 points, as a defensive long-term investor, how do I judge the market position?

I am pretty sure it isn't "unjustifiably pessimistic" but is it "irrationally exuberant"? What is the right way to rationally judge the market state at some point in time?

  • 1
    People were asking this same question 5 years ago.
    – RonJohn
    Mar 11, 2019 at 13:35

2 Answers 2


"Unjustifiably pessimistic" or "irrationally exuberant" are just labels. An equivalent description would be overbought and oversold.

There are a number of financial and technical indicators that can be used to measure them but no metric accurately pinpoints their limits. Any extreme reading can become even more extreme.

As a simple example, when the markets were down 30% in 2000 and 2008, one might have called that "unjustifiably pessimistic". At 40% down, even more so. And at 50%? How do you know where it stops? You don't. It's a subjective conclusion.


It isn’t necessarily either.

As a stock market average, it is possible that some of its individual stocks are in the “irrational exuberance” phase, and others are in the “unjustifiable pessimism” phase. It is possible for the average to never be in either phase even if you accept the premise that most stocks experience both phases occasionally.

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