Introduction to Keynes’ Famous Quote
In this current economic climate where shares are being sold off all around the world, I thought it would be a good opportunity to discuss John Keynes famous quote – ‘the markets can remain irrational longer than you can stay solvent’, and what it actually means.
Understanding Market Irrationality
It basically refers to the fact that in bull markets shares can race ahead of themselves and overvalue certain companies whilst in bear markets shares can fall substantially resulting in certain shares trading far below their realistic fair value.
Indeed it is these scenarios that enables investors and traders to pick up bargains and sell short companies that are valued far too highly (in terms of market capitalization/profits or price/earnings ratios, for example).
These moments, although chaotic, are where savvy investors and traders find opportunities. You’ll often see them picking up quality companies at a discount, or selling short on businesses that are grossly overhyped (usually evident by inflated P/E ratios or crazy market caps that make no real-world sense).
How Long Can Markets Stay Irrational?
These markets are said to be irrational because they do not accurately reflect true market valuations but what John Keynes is pointing out is that these irrational markets can stay irrational for a very long time.
In other words, in relation to individual shares, just because a stock is massively oversold does not mean it cannot go even lower, and vice versa when the share price is overinflated.
What Keynes was highlighting is the simple but harsh truth: these irrational conditions can last a long time.
Just because a stock looks undervalued doesn’t mean it’ll bounce back right away — it can keep falling. And a stock that’s clearly overpriced? It might keep rising, defying logic, before eventually correcting.
That’s the uncomfortable part for traders — price doesn’t always follow reason, at least not immediately.
Long-Term vs. Short-Term Market Movements
In the long term prices will usually drift towards their true value but shorter term they may remain oversold or overbought for a very long time.
Therefore this is worth bearing in mind particularly in the present day when so many people are involved in short-term trading through spread-betting and trading in futures and options where leverage is often used to trade larger positions on margin.
This is especially relevant now, when retail investors are trading on apps, and people are leveraging up with futures, options, and spread-bets — trying to make quick profits. In these kinds of environments, price action often disconnects from company performance.
Trading vs. Investing in Irrational Markets
Irrational markets do not necessarily present great trading opportunities. If you’re an investor you can drip-feed your money into good quality highly profitable companies in bear markets and not have to worry so much about short-term falls because you have a longer term view and are not trading on margin.
However if you are a trader trading on margin you can very easily lose a lot of money, particularly if you are very highly leveraged.
If you’re an investor with a long-term mindset, this isn’t necessarily bad news. You can slowly invest in strong, profitable companies during downturns without stressing too much about the daily price swings. You’re not using margin, you’re not over-leveraged, and you’re playing the long game.
But if you’re a short-term trader using leverage, it’s a different story. One wrong bet in an irrational market — especially when heavily leveraged — can blow up your account faster than you’d think. And unfortunately, irrationality doesn’t wait for logic to return before taking your money.
Importance of Capital Protection
Therefore it’s important to protect your capital as much as possible. This means using a tight stop loss and either taking your profits when they are there or letting your winning trades run for as long as possible.
That’s why capital preservation is key. It sounds boring, but it’s what separates long-term survivors from those who burn out. Use stop-losses, know your risk per trade, and avoid revenge trading when things go south.
It’s better to miss out on a trade than to be forced out of the game entirely. When profits are there, take them. And when a trade is working in your favor, let it ride — but always with a plan.
Final Thoughts on Keynes’ Wisdom
You will often hear this famous quotation about the markets remaining irrational longer than you can stay solvent because it’s completely true.
You often get irrational markets when there’s a strong bull or bear market so it’s well worth bearing in mind during this present economic crisis because there are some good quality companies trading at very low prices at the moment, but they could go even lower in the short-term.
It’s worth remembering, especially in times like now. There are some great businesses out there trading at bargain prices, but that doesn’t mean they won’t go lower before they recover. Patience and discipline matter more than ever.
Conclusion
At the end of the day, the stock market doesn’t always behave in a logical or predictable way — and that’s exactly what Keynes warned us about. Whether you’re investing for the long term or trading in the short term, it’s important to remember that price and value don’t always move together, especially in times of economic uncertainty.
Irrational markets can test your patience, your confidence, and your strategy. But by staying grounded, managing your risk, and focusing on what you can control, you give yourself the best chance of surviving — and thriving — when the dust eventually settles.
So take a step back when things get noisy, keep your emotions in check, and remember: you don’t have to catch every move. Sometimes, just staying solvent is the win.