There is more than one way for investors to show they have forgotten the lessons of history.

One way is to forget that the irrational exuberance of a bull market will at some point come to an end. The other, when the bull run does dissolve in tears, is to adopt an irrational crankiness in a short space of time.

If the mood of investors after what's been described as one of the most traumatic half year profit seasons in memory isn't one of irrational crankiness, it's not far from it.

The high-profile disasters at blue-chip companies such as AMP and Southcorp set the tone. Yet these were mainly a result of botched overseas expansions. Overall, performance wasn't all that bad: more blue chips exceeded earnings forecasts than fell short. The problem was that investors treated firms that feel short as mercilessly as those whose profits evaporated.

Aristocrat Leisure, a maker of gambling machines, lost half its market value after confessing a modest fall in earnings. Qantas shares were dumped after a solid half year because chief executive Geoff Dixon made the perfectly obvious statement that a war would imperil earnings forecasts. Harvey Norman, one of the best retailers in the country, was punished because earnings were slightly lower than expected.

The high-handedness - or despair - of investors reflects the fact that uncertainty is everywhere they look. It's not just the prospect of war in Iraq. The world's major economies were stuggling to grow (the United States), or on the canvas (Europe and Japan) before US President George Bush brought matters to a head in the United Nations Security Council last November.

Despite the short war armchair generals predict, good growth could be slow to return.

Accordingly, stockmarkets around the world have had another fit of the vapours.

The British market fell nearly 5 per cent on Wednesday, and was once again flirting with five year lows - at half its bull market peak - before rallying. French and German stocks still languished at 60 per cent and 70 per cent below their peak values respectively, reflecting sullen demand on the continent.

Even the Australian market, which withstood last year's global rout, has succumbed to the malaise, although it never had far to fall.

One explanation for the sourness is that investors have been disappointed too many times. This time last year, The Australian Financial Review remarked on the surprising amount of optimism in the market, which was forecasting an earnings rebound of almost 20 per cent in fiscal 2003 despite an expected increase in interest rates. The optimists seemed to be setting unachievable targets, which risked bringing more disappointment.

In the event, rates did not increase by as much as predicted because growth and inflation moderated, and earnings are now tipped to grow by 8% still healthy but less than half the rate tipped a year ago.

There may still be room for disappointment. John Sevior, head of equites at Perpetual Investments, doubts companies will "get within a bull's roar" of the 8 per cent target. Such scepticism could explain why some top companies are trading on such superficially attractive terms: AMP and Telstra are both yielding about 6 per cent, but concerns about their offshore businesses are keeping investors on the sidelines.

It will take some time for investors to regain their trust in firms and their managers. And it will require a demonstrable effort by directors to lift their standards of governance. Any illusions they might have had about there being no need for action on this front would have been shattered by the profit season's events.

Australian boards and managers are generally ethical and competent; some are very good. They seem prepared to embrace the new corporate governance standards sweeping the world, though they are - perhaps sensibly - allergic to prescriptive, one-size-fits-all solutions.

It is always worth keeping things in perspective. Whether the "capitulation" that marks the bottom of the market has arrived or not, markets can overshoot in either direction and stocks must be closer to fair value than they've been for years. The silliest thing for investors to do would be to put up the shutters and walk away.

Equities have consistently performed better than other types of investments over the past century. Their edge may not be as pronounced over the next 20 years as in the past 20, but they are the only class of investment that can conveniently harness the full productive potential of competitive capitalism, which has a unique ability to adapt to changed circumstances. That makes them impossible for long-term investors to ignore.

Source: Australian Financial Review - Editorial Opinion