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A Couple Lessons Learned from Recent Experience

  • Not only did the investing herd have the outlook for rates wrong, but it was uniformly inquiring about the wrong thing.
  • Asset prices are often set to allow for the risks people are aware of. It s the ones they haven’t thought of that can knock the market for a loop.
  • Forecasters usually stick too closely to the current level, and on those rare occasions when they call for change, they often underestimate the potential magnitude.
  • Most people easily grasp the immediate impact of developments, but few understand the “second-order” consequences…as well as the third and forth.
  • People often fail to perceive that these fault lines exist, and that contagion can reach as far as it does. And then, when that happens, investors turn out to be unprepared, both intellectually and emotionally.
  • A grain of truth underlies most big up and down moves in asset prices. If you think markets are logical and investors are objective and unemotional, you’re in for a lot of surprises.
  • There’s a great deal to be said about the price change itself. A well-known quote from economist Rudiger Dornbusch goes as follows: “In economics things take longer to happen than you think they will, and then they happen faster than you thought they could.” If we append the words – they go much further than you thought they could.
  • If feels much better to buy assets while they’re rising. But it’s usually smarter to buy after they’ve fallen for a while. Bottom line, there is little logic in investor psychology. Also, it’s hard to analytically put a price on an asset that does not produce income.
  • On the other hand, in investing there is always another hand – high levels of confidence, complacency and composure on the part of investors have in good measure given way to disarray and doubt, making many markets much more to our liking.
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