Friday, March 05, 2010

Klarman's False Lessons

Seth Klarman (look no further than left upper corner of this web-page) in his annual letter described 20 lessons from the financial crisis which, he says, “were either never learned or else were immediately forgotten by most market participants.”

H/T My Investing Notebook, original source at

I list here the amazing "False Lessons":

There are no long-term lessons – ever.

Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.

There is no amount of bad news that the markets cannot see past.

If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.

Excess capacity in people, machines, or property will be quickly absorbed.

Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.

The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.

The government can indefinitely control both short-term and long-term interest rates.

The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

It would be really enough if we might learn at least the false lessons, for more lessons look here ...

I am lean and with tons of cash on hands, and waiting for nuclear bomb to hit the market :) ... making myself for fresh approach next week.

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