You've heard pundits say how investors have not learned their lessons and that foolishness reigns. While it's true that there always is a bit of excess enthusiasm that bubbles to the surface when news turns slightly positive, I'm convinced that the last 12 months have taught investors lessons that will be useful moving forward from here. Here's what I believe some investors (like you!) have learned from this brutal downturn:
Business Mistake
1. Leverage has downsides:
Yes, borrowing increases positive returns if all goes well but it can get very ugly, very fast if the environment moves against you. Real estate was bought essentially on margin which worked well when prices went up but was a disaster when values collapsed. I suspect that even government regulators have learned that controlling the amount of naked margin is in the best interests of the overall market and is a necessity to protect investors. Lesson here? Careful when you borrow money to invest; there is nothing more painful than a margin call when it forces you to sell at the worst possible time.
2. The worst-case scenario is a possibility:
In fact, what you imagine could be the worst-case outcome is probably not as bad as it can get. Remember those who said real estate would never drop in value? Or that there was no way the Internet bubble could burst? Or that negative amortization home mortgages were a good idea? Or that stocks were pretty much a guaranteed 10% a year return? Or that GM, Citigroup, and Fannie Mae were unfailingly solid? The truth is that all expectations are merely that - hopes for outcomes with no guarantee. And in the world we live in today, characterized by fast-moving circumstances and lack of transparency, outcomes can be extreme.
3. No one has all the answers:
As I've outlined in previous comments, the economy and the markets are often hard to explain on the short-term. And even long term, impossible to predict with certainty. Those that comment that they have figured out the future without doubt (experts or not) and that they know the answers with complete certainty should be listened to with great suspicion. Even if their arguments make sense, do not assume that they absolutely correct. Listen to their warnings (or their hopes) but do not blindly believe for a moment that they are infallible. Pundits provide their best judgments but they are merely opinions and not truth; no matter how much they believe their own press.
Conclusions:
There are many other lessons I'm quite sure investors have learned in this brutal 12 month period. With the type of pain inflicted near historic proportions, learning from this experience is at least something good that can be taken from a bad situation. It is often been said that if you fail to learn from the past, you are doomed to repeat it. Some investors will do exactly that; repeat the same mistakes over and over again hoping for a different outcome. Not the best strategy for long-term success.
But you are different, right? While you have some regrets, you will move forward using your best judgment, think for yourself after carefully analyzing others' views, and realize this is a long-term battle; one brutal loss does not end your mission. Yes, you will move forward having learned lessons. And these valuable lessons will make you a better investor and increase your chances of achieving your long-term objectives. That's what great investors do.
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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.