Hyman Minsky, a well-known 20th century US economist, was professor of macroeconomics at Washington University in St. Louis and a distinguished scholar at Levy Economics Institute at Bard College.  He is best known for developing his financial instability hypothesis.  Minsky stated that the greater the stability of the stock market, the greater the instability that follows.  My version of this is that the more the stock market moves up without a correction, the further it will fall.

Minsky’s Hypothesis

Minsky unveiled this theory in 1992.  He died in 1996 and did not live to see the tech bubble of 2000-2002 or the US housing bubble of 2007-2009, both demonstrations of his hypothesis.  During the years preceding these market collapses there were “bubbles” building inside the stock market.  They were detected by a few experts, but were largely ignored or explained away by “Wall Street” and many investors.  It was commonly believed that an investor needed to “get onboard” or be left behind as was aptly portrayed in the movie, The Big Short.

Hyman Minsky

I suspect that if Minsky were alive today, he would continue to stand on his hypothesis, “The greater the stability of the stock market, the greater the instability that follows.”  In my opinion, this stock market is the perfect example which has led to previous collapses.  Sir John Templeton said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”  It seems that we are either in the euphoria stage – or close to it.  I frequently hear people talking with glee about how high the stock market is right now and how much money they are making in their 401(k)s or brokerage accounts.  I do not hear people having a realistic understanding of the cyclical nature of the stock market booms and busts.  However, I believe that Minsky would be extreme caution.

Where do we go from here?

I would not advocate that an investor sell all of their equity holdings and get out of the stock market. There may be more gains left in this euphoric bull market.  Truthfully, no one knows when the bull market will end nor do they know how.  However, it certainly seems like it is on the euphoric end of the cycle and, as Mr. Templeton said, historically euphoria has led to the end of bull markets.

In conclusion, now, more than ever, is a good time to start thinking about what a good defensive investment strategy would look like.  Whether you are a buy-and-hold investor or use active investment management now is an excellent time to match your allocation or strategy with your risk tolerance.  It is also a time in which wise investors know exactly what they own and why they own it.

Strategy and knowledge could greatly enhance successful portfolio management during the next bear market.


Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.


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