It’s been awhile so we are doing another edition of Blogger Wisdom this week on Abnormal Returns. As we have done in previous years we have asked an esteemed group of finance bloggers a series of (hopefully) provocative questions. Blogger answers are unedited and the author’s name, blog name and Twitter handles follow. We hope you enjoy these posts as much as we do putting them together. You can read yesterday’s post on future return assumptions.
Question: Ten years have passed since the onset of the financial crisis. What about the past decade has changed your thinking about the economy, financial markets or investing? (Answers in no particular order.)
I’ve gained an immense amount of respect for the market. I think too many people still underestimate how difficult a dragon it is to slay.
I knew nothing about finance 10 years ago and have only begun to scratch the surface of understanding in the last few years. Ask me again a decade from now.
For better or worse – depending on how you look at it – my first full year in the investment industry was 2008. I was immediately thrown into the deep end of the pool. While it was painful at the time, I am grateful to have gone through such an experience early in my career as I learned many valuable lessons that I could have never learned from one of my finance courses in college.
From that first year up until now, I’ve seen the stock market get cut in half and I’ve seen the stock market nearly triple. I’ve seen negative interest rates across the globe amid myriad warnings of a rising rate environment. I’ve seen new asset classes literally created out of thin air in the case of crypto. I’ve seen a bull market last longer than anyone could have possibly imagined, with countless false alarms along the way. What has changed in my thinking throughout all of these events is to never be surprised when financial markets surprise us.
A contributing factor in the financial crisis was a lack of information about derivative products. Those who thought the subprime issues could be contained, for example, did not know that the effects would be multiplied six-fold by derivative bets. While reporting of positions is somewhat better in a notional sense, we still do not have much grasp of net exposure. We also have done little about the strange role and incentives of rating agencies. I have more confidence in both public and private institutions when the needed information is available.
People consistently underestimate the most bullish long-term trend in the economy and markets – the underlying inherent desire for human beings to improve their current state of being.
Nothing. People are nuts today, and we didn’t learn anything from the financial crisis. On the bright side the banks are in good shape, but at the rate of regulatory deterioration that might not be true 5 years from now. Debt-based financial systems are inherently fragile. Our consumers on the lower and middle classes, our nonfinancial corporations, and governments globally are taking on too much debt. Those relying on repayment may get rude surprises again, this time with no bailouts.
I don’t know how much of my thinking has changed so much as how wrong much of what we were all taught turned out to be wrong or at least not always correct. Nine or ten years of printing money and monetizing debt (yes, I realize there’s been more to it) didn’t cause inflation? How is that possible? Also we should all realize that any company, a n y c o m p a n y, can fail. That isn’t a prediction about who will fail just that any can fail.
The housing cycle IS the economic cycle, and there’s no shortage of buyers for US government debt.
A couple things. The massive injection of central bank liquidity has appeared to have an enormous impact an asset prices and cross-correlations. Seeing this occur in practice, and not just in textbooks, has forced me to think more seriously about the relevance of liquidity (put differently, scarcity) for the basic rules of investing. Second, the rise of the gig economy alongside some gutting of lower and middle class jobs via automation has led me to reckon much more seriously with the meaning of work in peoples’ lives and its impact on civil society and political stability.
Value investing works, but applying a value strategy without some kind of momentum filter is a recipe for frustration because cheap stocks can stay cheap for a long time in the absence of a catalyst. You don’t necessarily need to know the catalyst ahead of time. Simply waiting for a cheap stock to resume some kind of modest uptrend will save you a lot of grief. This has been a decade in which growth has absolutely thrashed value.
I think I’m half as smart and twice as scared as I thought I was in 2007.
Scale can make things weird. Vanguard’s success has me rethinking how non-corporate ownership structures can out-compete for-profit ones in certain cases. Amazon’s ability to be huge yet lower prices/increase convenience for most people is impressive.
Bitcoin’s lack of growth surprises me, given what an elegant solution it was to practical currency problems.
The government will get more involved than you think. The big banks and government are more in cahoots than I thought-and more opaque than I assumed. The general public has no understanding or tolerance for risk.
Yes, here we are almost 10 years since the depth of the U.S. financial crisis and much of that time has been characterized by a long, upward march in the major U.S. stock indices. In fact, this long uptrend in stocks has been called “one of the most hated, disbelieved bull markets in history”.
I have learned much about trading, investing, and financial markets in that time (in no small part due to my own trials and errors – tuition paid to the markets). One thing that remains unchanged is the market’s ability to rise, fall, and generally confound the majority of investors. As the great speculator Jesse Livermore wrote, “There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
To be honest, I was pretty clueless about investing and the financial markets ten years ago (although I fancied myself as a bit of an expert!) The financial crisis was a real wake-up call for me and it set me on the path to learning how things really work.
I am reminded that Investment companies will securitize anything. This might sound clever at first, but it reminds me to keep things simple and understandable. I think I am much more suspicious and less trusting of everyone (think of what just happened with the VIX, for example). The markets do everything they can to get investors and traders to part with their discipline. When then do so, they typically part with their capital also. I’m convinced that keeping your discipline is the key to longevity.
I effectively knew nothing about markets or investing coming out of college in 2007, so basically all of my thinking has changed.In 2007, I viewed investing as a daily activity. I read forecasts and religiously followed market news. I tried to outsmart the market through security selection. I traded too much and for all the wrong reasons. All of those things would conflict with my core investment values today.
Needless to say, I’m very lucky that nearly all of my savings during the first decade of my career went into a 401(k) plan that systematically invested in low-cost index funds. That protected me from destroying the benefit of compounding early in my career while allowing for some hands-on education in my small taxable account.
How confident one must be in order to hold a contrary opinion to the market (collective opinion) as your conviction will be tested…and how much it hurts to have your opinion tested.
For the ~25 years or so prior to the GFC, both the economy and markets were relatively tranquil compared to most of history, so I, like many others, assumed that the paradigm had changed permanently. The GFC and subsequent decade of lackluster economic growth made me realize that this was wrongheaded, and that one must be more prepared for adverse outcomes. From an investment point of view, I came to appreciate more the benefits of strategies that don’t get much attention, such as low-volatility, and have become forever skeptical of large investments in heavily regulated industries such as big banks. Finally, the huge divergence in global markets post-GFC (e.g. Europe and EM lagging the U.S. by a wide margin) made me aware of my ignorance to the fact that, in the aggregate, global equity markets are not fungible, and that investors at the index level need to be conscious of the bets they are really making with their capital, particularly as it relates to currency fluctuation.
I’ve been surprised by the willingness of investors to embrace risk in the aftermath of the finanical crisis. Back then, it was a feeling of “never again,” but the caution went away. The central banks have ruled the decade and have gotten their wish for investors to embrace risk taking. We’ll see what that means when the next retrenchment occurs and whether it follows the pattern of the last two crises of being fairly brief but sharp.
More conviction that using models/systems and sticking to them like “grim death” (@CliffordAsness quote) is the way to go. Also, recognizing that “keep[ing] dry powder to buy dips” (@millerak42 quote) is equivalent to ad-hoc marketing timing. With near certainly, if I wasn’t using models along the way, I would have been insanely underinvested over this period (because my lizard brain would have told me to do so).
The serial underperformance of value investing keeps me up at night. Granted, it still works when combined when other attributes are present, and much of the market’s appetite for growthy/high-quality/secular names may in fact be a nice little feature of helicopter money and a plummeting interest rate regime; but “narrative” seems to have dominated investment returns for so long now that one wonders just how long it will take for Ben Graham’s short-term voting machine to become his long-term weighing machine. Ben Hunt @epsilontheory suggests it’s a voting machine over any time horizon – and he may be correct (and he’s a lot smarter than me) – but I, for one, still think that fundamentals actually must, and do matter. We aren’t buying art, we are buying cashflows.
We have had elevated valuations since the early 1990s–and that hasn’t changed, even in the aftermath of the great financial crisis. My fear: We’ll never again regularly see the low price-earnings ratios paid by earlier generations, though — fingers crossed — we might get occasional brief chances to buy at those valuations.
Each year continues to validate the need to focus on where market strength is. It’s something that shifts and turns in some way over various time-frames, some trends last several months while others are more choppy. Not focusing on presidential tweets, Congressional and/or Hollywood scandals or what CEOs are forecasting out of self-interest for the future of their company. Different themes raise their head each year, some good and some bad, some tempting you to stray from your strategy (bitcoin anyone?) while others solidify the importance of a process. Understanding that there will be tough times and the validity and need of emotional training you must put yourself through to handle those times is what leads to long-term success.
That over the short-term trend > value > fundamentals in terms of driving returns, while over the long-term fundamentals > value > trend and that it’s too difficult for me to focus on the long-term.
Thanks to everyone for their time and effort. Stay tuned for a new Blogger Wisdom question tomorrow.