You will recall early 2009 when the financial world seemed to be in the midst of collapse. Seven years later we can see it more clearly. Hindsight is wonderful. What did we learn?
First we learned that people are emotional. Fear is deadly. Fear makes us want to hide. Financial values have fallen and we are afraid and embarrassed by our stupidity in being this toxic asset in the first place. Value assessment is replaced by negative emotions.
Second we learned that politicians panic more easily than we do. Great running about and flapping arms. Shrill cries for the villains. Experienced people castigated and forced into deals that made little sense. If you are political, the appearance of doing something is more important than the actual results.
Third the Fed bought up huge quantities of asset backed securities of little market value. Boat loads of newly printed money made the deal and created weakly connected fears of inflation. The horror.
Fourth, we learned that politicians, financial writers and TV pundits know little about the derivative market. You will recall the assessment of hundreds of trillions of derivative assets out there. All derivatives have two sides. The net value of all of them is zero.
It is a wonder that we lived to tell the story. Now looking back, what has happened?
- People are still fearful by times. Harsh memories die slowly. They have lost a little confidence in themselves and their country. Not good.
- Cute headline names are invented. “Toxic asset” is a one-second sound bit with about as much depth as a liter of oil spread evenly over Lake Superior.
- The villains are still out there if in fact they were villains at all.
- Derivative is still a bad word except in the math department.
- Toxic assets may be more benign that we thought. Bloomberg Business Week recently published an article with the title, The Big Long: Making a Killing in Market Everyone Left for Dead. UK trader Milan Patel and his associates did okay by going against the hysteria. About eight times their capital. Could we go so far as to say the toxic asset idea may have been over-stated? One of their trades looked like this.
So what is the meaning?
- Price in the market is not value.
- Panic is contagious
- People who know the least panic first
- The world does not change very easily. Microsoft at $30 per share would be pretty much the same company as it was at $60.
- It all evens out after a while. If you look at a 100 year long market graph most of the sharp downs and euphoric ups are near invisible.
- If you have a well founded plan to invest for a long time, the noise does not matter.
Have such a plan or your emotions will eat you up.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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