We all make mistakes and the trick is to learn from them.
Sadly some of the key lessons of the credit crunch haven’t been taken on board, so now as the economy of the US starts to head out of the mire of the great recession, here are a few reminders.
House prices and mortgages caused the credit crunch.
Investing in property is not a sure way in getting rich. A house is a home not an investment. Second homes and property for rent is not a no lose bet. The whole edifice of the world economy was nearly sunk by the over investment in property sand the huge leverage that went along side it. Without trillions of dollars of new money and artificially cheap money the house prices enjoyed today would collapse. Investing in housing is a risky business.
Buy the dip.
Buying the dip is great, so long as the dip doesn’t turn into a crash. No technique works forever and it’s the exceptions to the rule that do the damage. Today there seems to be an invisible hand that jumps in and supports the market when ever its in trouble. That hand is not so invisible in Japan where the central bank simply buys billions of dollars of ETF to prop up the market.
Investors can’t rely 100% on these gifts. Buy the dip with caution, like Russian roulette you can’t expect to lose more than once.
This time it isn’t different. No it is not a super-cycle.
Commodities were going to be a bull market forever. China was going to grow at 8% indefinitely. We were going to be plum out of oil.
Crashes come and go and it is normally when everyone is sure nothing can go wrong, there is one just around the corner.
The markets have been rallying now since 2009. That’s a very long time indeed. This time is not different. As Warren Buffett says, get fearful when people are getting greedy. Things are going to get greedy soon enough.
If you can’t see the greater fool, its you.
One minute a bank or company is sound, the enterprise is a colossus. Suddenly its broke. One month a tech firm is the best thing on the market, by the end of the year the pundits say its toast. Huge endevours don’t change that fast, what does go from heaven to hell and back is the words spouted about them. The numbers normally tell it all well in advance. It’s a dangerous game to listen to the stories coming out of wall street, best to look at the numbers and judge the situation with basic arithmetic. As investors in China just found out, hype is dangerous for your wealth. Fundamentals can only be suppressed for so long. Don’t be left the ‘greater fool’ holding the baby.
Risk never dies.
Even with the economic mummy state of zero interest rates and interventionist regulators, the markets are not safe. The higher they fly, the higher the risk. Those that pile on risk as a market rises do great while the market holds. They burn up when it corrects. Risk is a constant. If you squeeze it from one moment you squish it into another. If you chase it from one place, it hides in another. If its eradicated, its simply hiding somewhere clever and about to gush out when the dam breaks. After years of rally its good to remember while risk equals reward, too much risk equals certainty, the certainty of loss. As every cowboy knows, when it gets too quiet, bad things are due to kick off.
Ironically we may be on the brink of a period of economic boom, but booms are preludes to busts. All the boom-time profits can be destroyed in a few weeks of crash, so the key maneuver when the going is great is not to make yet more, but instead to know when to start taking money off the table.
The central banks can’t go on indefinitely nanny-ing the markets through every wobble. Interest rates must rise one day. We haven’t seen the last crash in human history.
With that in mind I predict volatile times ahead.