Monday, October 6, 2008

The Credit Crisis Presents a Rare Opportunity for Learning and Experience

For those of us who weren’t here to witness a crisis up close the current credit crunch offers a rare opportunity to learn

Experience is what separates the men from the boys and in the stock market experience is one of the most important success factors for investors.

In the past five years, stock markets around the world blossomed. The US markets showed solid returns, emerging markets throughout the world climbed to new highs the likes of which were not imagined. The High-tech industry returned with a bang and peace and happiness reigned in the land.

The old and battle hardened market players kept repeating one painful truth. The novices have yet to experience a real stock market crash. Young fund managers and investment brokers have been living a euphoric life in a loss free environment for too long. I remember reading many articles about the problematic atmosphere in trading rooms and brokerage firms living under the illusion, or hope more likely, that this market environment is here to stay.

There have been some people who even went the extra mile and claimed that the markets have become so efficient everything is already priced and factored into stock prices. If understanding the financial asset we bought was so complicated I guess we should never speak of this notion of efficiency ever again.

What’s the upside then?

Much like any other crisis there is value to be had. I’m not referring to the obvious (and very uncertain) potential for fabulous returns. I’m talking about experience. The experience this crisis offers us, as investors, is priceless.

Every day give us new insight and understanding into market mechanics and human psychology. The next time around we won’t be that surprised anymore.

What have we learned so far?

We learned to be more skeptics. Even the most advanced banks with the best personnel available were blinded by greed and indifference to risks. Their vast knowledge, capabilities and IT systems didn’t save them. Their controls faded like the wind and they all fell prey.

We learned not to worship those “know it all” brokers, analysts and consultants. The trend was their friend and when it suddenly changed they all stood baffled, staring blankly into the darkness.

We learned the media is really all about hypes. We learned that instead of encouraging debate and investigative reporting all we get are huge flashing red arrows and words like plummeted, catastrophe and crisis. The media lives and feeds of fear and so encourage it.

We learned that regulators will never have enough resources, manpower and abilities to really regulate. The industry will forever be one step ahead of the regulator while the latter fights to catch its breath. We learned governments act slowly or not at all (truth be told the US government worked surprisingly fast in this crisis).

We learned to regard rating agencies and financial reports with due care. We learned conflicts of interests are everywhere and that AAA doesn’t really stand for anything once market conditions change. We learned to lower our expectations when it comes to objective reviews which the company pays for.

We learned the market can turn on us in days and we’ll never see it coming. We learned we won’t notice we’re jumping with no parachute until it’s too late.

We learned no one really knows what’s going on in the markets. We learned fear and volatility are everywhere and how quickly the markets stop being about finance and economy and become totally dependent on psychology.

I’m very curious as to what we have yet to learn. Especially how the uptrend will return, sooner than we expect and as always, we won’t notice it until it’s too late.

Related posts:

Image by: automania


Kara said...

Interesting post we should all take the time to learn from this crisis. Here is a YouTube that talks about the crisis and how we got here. for part 1 & for part 2

Praveen Puri said...

Unfortunately, the lessons will last only as long as today's investors are in the marketplace.

When the next generation come in, the mistakes will probably be repeated...

That is why a lot of the safe-guards put in after the Great Depression (in the 1930's and 40's) were seen as out-dated and were dismantled in the 1990's and 2000's - leading to today.

Stock Market for Beginners said...

Thank you for the great post. Like my two other fellow bloggers mentioned human kind has a problem of forgetting easily. I, too, bet that we shall forget what went on as soon as we are out of this pit and at a latter stage quote the current circumstances like we quote about the financial crisis the market went through in 1930ies, when the market is hit by another tsunami. However I must thank you once again for taking your time to enlighten the others.