Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt
It appears as if the market declines of 2008 and early 2009
are being treated as nothing more than a bad dream, as if
the investment industry has gone right back to business
as usual. This extreme brevity of financial memory is
breathtaking. Surely, we should attempt to look back and
learn something from the mistakes that gave rise to the
worst period in markets since the Great Depression. In an
effort to engage in exactly this kind of learning experience,
I have put together my list of the top ten lessons we seem
to have failed to learn. So let’s dive in!
Lesson 1: Markets aren’t efficient.
As I have observed previously, the Efficient Market
Hypothesis (EMH) is the financial equivalent of Monty
Python’s Dead Parrot.1 No matter how many times you
point out that it is dead, believers insist it is just resting.
I must admit I really thought we had this one licked
(evidence of hubris on my part, for sure). While many
practitioners seem willing to reject the EMH, the
academics refuse to jettison their treasured theory. Not
only have two economists written a paper arguing that
the TMT bubble wasn’t a bubble, but now several have
written papers arguing that not only should the EMH be
absolved of playing any role in the recent crisis, but that
if only we had all understood the EMH better, the crisis
wouldn’t have happened in the first place!
Stephen Brown of NYU (author of one of the
aforementioned papers) actually argues, “That it was the
failure to believe the EMH that was in fact responsible
for the crisis.” His view is that “It was believed to be
1 See Chapter 1 of Value Investing (2009) Montier, J.
2 See Stein vs Paradigm Mirasol, The United States Court of Appeals for the Eleventh Circuit, No. 08-10983 (http://www.ca11.uscourts.gov/opinions
rather easy to make money investing … investors
borrowed heavily to invest … The resulting increase in
leverage and resultin