The investment market is driven by two things; fear and greed. Fear is temporary, greed is permanent. Markets over time always move up but there are periods of fear and doubt that cause investors to retreat. But only for a short time. Greed takes over when investors see others making money and want to get back in the game before the opportunities get away. This happens in the stock market and in VC investing.
When fear takes over it consumes everyone. Everything looks black. Investments that looked great 6 months ago look like risky charades with no business fundamentals today. We saw this happen in 1987, 1994, 2001, 2008, and again now in 2011. The difference today is that the mood swings from fear to greed are happening every other day instead of every three to six months. Investors are confused and even bi-polar.
There are usually a few high profile examples of "irrational exuberance" that were indeed big mistakes. These irrational valuations cause investors to rethink all investments and second guess themselves. When this happens the rest of the market gets slammed irrationally.
But fear is temporary, greed is permanent. Greed is a much stronger emotion than fear. Greed in this sense is a good thing, more like motivation and risk taking. No, I am not channeling Gordon Gecko. Simply saying that greed and competition is more powerful than fear.
Entrepreneurs see opportunity - Regardless of the environment, entrepreneurs are always going against conventional wisdom. They think big, think about what could be, and ignore the naysayers. Yes, entrepreneurs do take big risks, but they don't look so big to them. It just looks like a big opportunity. If it were easy or obvious everyone would be doing it. Entrepreneurs ignore the fear and focus on the opportunity. I have never seen an entrepreneur who said "I would start a business if only the tax rates were lower...or the interest rates were lower." It is all about confidence. If entrepreneurs are confident they will start businesses no matter what.
Consumers think differently - Consumers are more cautious when fear takes over, and more reckless when greed is in full swing. With consumers it is all about confidence. Fear = lack of confidence. Greed = supreme confidence. Individuals feel confident when the stock market is up and housing prices are up. When individuals feel confident they spend money, and even borrow money, to buy more stuff. Consumer confidence drives the economy. When consumers spend...business do well, stock prices go up, businesses hire more people, consumers feel more confidence and spend more. Virtuous cycle.
When confidence is down consumers "de-leverage" reduce borrowing, reduce spending, which hurts business, and starts the death spiral. The Fed can lower interest rates to ZERO, but businesses will not borrow or expand because they aren't confident. Likewise, consumers will not borrow money to buy cars or houses. Conversely, when confidence is high, businesses will borrow no matter what the interest rates (or tax rates) are.
Not to get into a political debate, but my point here is that interest rates (The Fed) and tax rates (Congress) have far less influence on the economy than they think. The political extremists in Washington arguing both sides of these issues have no clue how job creation and business actually work. Ignore them. Instead, focus your attention on entrepreneurs.
This too shall pass. Fear will subside and greed will take over. Consumers and businesses will borrow money and expand. The stock market and housing market will again be good investments. The virtuous cycle will again start turning in the right direction.
This market madness is of no concern to start-up entrepreneurs. Stay focused on solving real problems and creating new opportunities. The markets will reward you for your focus and perseverance.
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