It would be great if we could extract lessons from every financial crisis and then apply those lessons to avert future crises. Alas, writes Morningstar columnist John Rekenthaler, “The market’s turning points are never evident until after they have occurred.”
That’s not to say, however, that some don’t read the writing on the wall and act accordingly. Rekenthaler writes, “Investors of various backgrounds figured out the housing bubble before it popped. Many more anticipated the 2000-2002 tech bust, as hundreds of hedge funds dodged that downturn altogether.” However, he argues, almost none of them were able to repeat their successes.
Because each disruption in the financial markets is unique, Rekenthaler argues that even if someone is skilled (or lucky) enough to make the right call, that’s no guarantee it’ll happen the next time around. He uses the example of the hedge funds that fared well at the start of the New Millennium but weren’t quite so fortunate when the subsequent bear market arrived. Not to mention the case of John Paulson, which he calls “the biggest of the big shorts”, who was recently forced to invest some of his profits back into his poorly performing hedge funds.
So what’s an investor to do? “Trudge along as always,” he asserts, “on the logic that the markets go up more than they go down.”