Suspension of disbelief or "willing suspension of disbelief" is a formula devised by the poet and aesthetic philosopher Samuel Taylor Coleridge to justify the use of fantastic or non-realistic elements in literature. Coleridge suggested that if a writer could infuse a "human interest and a semblance of truth" into a fantastic tale, the reader would suspend judgment concerning the implausibility of the narrative.
The phrase "suspension of disbelief" came to be used more loosely in the later 20th century, often used to imply that the onus was on the reader, rather than the writer, to achieve it. It might be used to refer to the willingness of the audience to overlook the limitations of a medium, so that these do not interfere with the acceptance of those premises. According to the theory, suspension of disbelief is a quid pro quo: the audience tacitly agrees to provisionally suspend their judgment in exchange for the promise of entertainment. These fictional premises may also lend to the engagement of the mind and perhaps proposition of thoughts, ideas, art and theories.
For me recent bull markets and even the current green shoots crowd is proof that many are willing to suspend disbelief not for entertainment but for profits. This is anyone's right but does not help one limit or understand risk and is increasingly a very dangerous proposition.
Let us deconstruct for a moment with three cases and show how this is used in conjunction with low-interest rates to create bubbles which often separate the unwise investor from his capital and well-being:
The Internet Bubble: How was Dr. Koop.com supposed to make money? What was there P/E? No one knew or cared. The myth of the Internet Revolution which was ceaselessly repeated by mass-media by investment pundits was old economy economics didn't mater anymore. If interest rates had been higher fewer would have been so apt to pursue what ordinarily was a less than logical investment. GE would have been a much better bet with their old school ideas of making and selling things.
Remember oil selling for $150 a barrel. Where was the limit? $200. $300. Infinity right. Wrong. Turns out the average barrel was traded 27 times before it came to market and near term market fundamentals in no way supported the price. Proof. What is the price now? Be glad you didn't buy at $150. This goes back to us suspending logic, cheap capital and the banks being able to leverage themselves with few to any restrictions to speculate and chum the water in relatively small commodity markets.
Housing. Housing. Housing. If housing was going to go up forever why didn't the big banks want to hold onto the toxic debt they were repackaging and selling down the river. Buyers were blamed for taking stupid loans but what about the artificially low-interest rates that allowed them to do it; the no money down loans and easy qualification that was pushed onto the market by Ivy League investment bankers. Shouldn't they have known better?
All of these were great stories with human interest but that in the end were to good to be true. As investors we need to be constantly asking ourselves if an investment really makes sense and if you are going to buy after the rally is already well under way then be sure the rally is founded in reality and sustainable. If you aren't sure then go small or stay out all together. If you think it smells bad dig deeper and look to fade as the bubble burst.
Be smart and be wary of following the herd too much. Caveat Emptor.