Via
Value Investor
Insight (ValueWalk also had excerpts of the letter
HERE,
HERE, and
HERE):
Here We Are Again
When the markets reverse, everything investors thought they
knew will be turned upside down and inside out. “Buy the dips” will be replaced
with “what was I thinking?” Just when investors become convinced that it can’t
get any worse, it will. They will be painfully reminded of why it’s always a
good time to be risk-averse, and that the pain of investment loss is
considerably more unpleasant than the pleasure from any gain. They will be
reminded that it’s easier to buy than to sell, and that in bear markets, all
too many investments turn into roach motels: “You can get in but you can’t get
out.” Correlations of otherwise uncorrelated investments will temporarily be
extremely high. Investors in bear markets are always tested and retested.
Anyone who is poorly positioned and ill-prepared will find there’s a long way
to fall. Few, if any, will escape unscathed.
Six years ago, many investors were way out over their skis.
Giant financial institutions were brought to their knees when untested
structured products that were too-clever-by-half turned toxic and collapsed. Financial
institutions and institutional investors suffered grievous losses. The
survivors pledged to themselves that they would forever be more careful, less greedy,
less short-term oriented.
But here we are again, mired in a euphoric environment in
which some securities have risen in price beyond all reason, where leverage is
returning to many markets and asset classes, and where caution seems radical
and risk-taking the more prudent course. Not surprisingly, lessons learned in
2008 were only learned temporarily. These are the inevitable cycles of greed and
fear, of peaks and troughs. Can we say when it will end? No. Can we say that it
will end? Yes. And when it ends and the trend reverses, here is what we can say
for sure. Few will be ready. Few will be prepared.
