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Wednesday, 31 December 2008

The Crisis of 2008: Lessons learned, unlearned and reinforced

Posted on 11:19 by Unknown
The one thing I can say about 2008 was this it was not boring. I know that there will be a flood of books coming out over the next few months telling us what happened, why it happened and most important of all, who to blame. I don't think that they will tell us much that we don't know already.  I have a different book in mind and this is what I want to do. I want to look inward and ask myself what I have learned from these last few weeks that I can incorporate into my "view of the world" looking forward. I The market collapse and investor reaction has been a humbling experience and has revealed how much I do not know or fully understand about finance.  Here is my initial list:

Things that I know now that I did not know on September 12....
  1. Nominal interest rates can become negative.
  2. There is no riskfree asset.
  3. Equity risk premiums can change dramatically even in mature markets.

Things that I thought I knew on September 12, that I am not so sure about now...
  1. Large companies in developed markets can always raise new capital.
  2. Bank runs are things of the past, with the regulatory oversight, accounting rules (mark to market) and risk management tools that we have today.
  3. Value investing (investing in low PE , high dividend yield and low PBV stocks) is less risky than growth investing.
  4. Dividends are sticky.
  5. Diversification across asset classes provides protection.
Things that I kind of knew on September 12 that have been reinforced since....
  1. Debt is a double edged sword. (The costs and likelihood of distress can be much higher than I thought...)
  2. A large cash balance is not just a wasting asset but protection against danger.
  3. The line between hedging and speculation is a very fine one... and easy to cross...
  4. Main Street and Wall Street are co-dependent. One cannot be healthy, if the other is not.
  5. We are in a global economy.
  6. Ignore illiquidity at your own peril.... Its cost can vary across time and across markets
  7. Risk is not just a number.
  8. Stocks don't always win in the long term.
  9. Smart money is not that smart!!! 
  10. Even great investors make mistakes! 
In fact, I have been collecting ammunition for each of these points, by scouring news stories from the the last three months. Sometime over the next year, I will sit down and start putting it down on paper. All I need is a good title!

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