Lesson #1: Expect the Unexpected
The
classic “expect the unexpected” is true for the market. Take measures to
prepare for the worst because the market reality can be worse that what you
imagined. Nassim Taleb popularized the term “black swan”
based on rare and hard to predict events happening. But it does happen.
Lesson #2: Too Much of a Good Thing
Watch out
when there is too much of a good thing. Markets constantly rising? Loans
available to anyone? Interest rates constantly hovering near zero? This
environment creates a false sense of security and when things fall back to the
mean, it will trigger a crisis.
Lesson #3: Control Risk First
Don’t try
to milk the last drop from your investments. Always consider risk and downside
first over potential returns. When entering a crisis, you have to make your
positioning conservative and be able to pounce on new opportunities while
others are forced to sell.
Lesson #4: Paying Less is Less Risky
Risk
comes from the price you paid for the stock. It isn’t uncertainty or
volatility. When there is great uncertainty and it drives prices down, you buy
with less risk.
Lessons #5: Financial Risk Models are Useless
Market
risk models done by computers are a waste of time. Reality is impossible to
model. Human logic based on actual and real time facts is more accurate than
boxed formulas and numbers.
Lesson #6: Don’t Invest for Short Term Gains
Don’t be
tempted to invest for short term gain simply to earn something off cash that’s
doing nothing. This is a higher risk strategy which increases the likelihood of
losses and illiquidity precisely when the cash is needed.
Lesson #7: Stock Price is Not an Indicator
The stock
price is not the fair value of a stock. People mistake that the stock market is
completely efficient. During good and bad times, the stock price is not an
indicator.
Lesson #8: Expand Your Circle of Competence
When a
crisis hits, your investment approach has to be flexible. Don’t get too stuck
on one method because opportunities can come in many different ways. If your
investment approach is too rigid, start to expand your circle of competence.
Lessons #9: Buy When Prices Go Down
Buy when
the price is going down. Volume is higher, there is less competition. It’s
better to be too early than too late. Don’t be afraid to buy things on sale.
Lesson #10: New Financial Products are Not For Your
Benefit
Be wary
of new financial products. They are always created in times of exuberance and
never questioned. The subprime loans were the rage as institutions only saw the
upside. Then it got killed.
Lesson #11: Rating Agencies are Useless
Ratings
agencies are useless and always a step late. What’s the point in lowering or
increasing a rating after it’s happened?
Lesson #12: Illiquid Stocks Come at a Price
Illiquid
stocks will cause high opportunity costs. Make sure you are compensated for
that illiquidity.
Lesson #13: Public Investments Still Rock
All things
being equal, public investments are better than private ones. During a crisis,
you have a better change to average down with public investments over private
ones.
Lesson #14: Debt is Evil
Stay away
from all forms of leverage. Don’t assume a maturing loan can be rolled over
since you have no idea what the capital markets will do.
Lesson #15: LBOs Are Disasters Waiting to Happen
LBOs
(Leveraged Buyouts) are stupid manmade disasters. If the price paid is too high
the equity portion is an out of the money call option.
Lesson #16: Financial Stocks are Risky
Financial
stocks are very risky. For example banks are highly leveraged, very competitive
and difficult to run businesses. Unless you have deep experience and
knowledge of the industry, invest in safer industries that you understand.
Lesson #17: Long Term Clients is Key to an
Investment Fund’s Success
If you
manage funds, having clients with a long term orientated mindset is crucial.
You don’t want investors pulling out their money during a crisis.
Lesson #18: Government Officials Don’t Know
Anything
When a
government official says that a problem has been “contained”, it’s a contrarian
signal. Pay no attention.
Lesson #19: The Government is the Ultimate Short
Term Trader
The
government is the ultimate short term oriented player. It will do anything to
quickly ease the pain with band aid patches on the economy or financial markets
without thinking about the implications. If the pain can be deferred to the
future, the government will take on huge amounts of risk to do so.
Lesson #20: No One Cares About You More than
Yourself
No one is
going to take responsibility for the crisis so you have to look out for
yourself and manage your risk well. Why? Because no one will take
responsibility for making you lose money.
http://www.oldschoolvalue.com/blog/investing-perspective/20-lessons-2008-crash/
