If you don’t get to grips with these you are destined to make a raft of errors in the months and years ahead. Do make an effort to learn from history – it will pay off handsomely.
Lesson 1 – sometimes we are mad rather than just bad
We are inherently bad at investing, there are volumes of research proving the point. But mostly we are just bad rather than mad.
But occasionally, we lose touch with reality, and morph from bad to mad investors. We succumb to a good story, greed, envy.
We all have this weakness; fear and greed overwhelm our ordinarily sensible behaviour.
Lesson 2 – buy and hold is NOT a strategy
Buy and hold (and forget), is not an investment strategy. Because markets recovered so quickly after 1987 it was convenient for some in our industry to trot out this lazy mantra – sadly it is still trotted out. But anyone who believes the next 30 years (and what might have worked) will be appropriate to the next 30 years is a fool, and not paying attention to the world around them today.
Lesson 3 – have a plan to deal with falling markets
Knowing we can be irrational, we need to have a plan to deal with falling markets, when we will become very emotional and tend to make expensive mistakes. In a rational moment you MUST develop a plan of action. It might be as simple as applying a Stop-Loss to get you out – but it must also allow for a point in time when you will re-purchase – many sold prior to and during the 1987 Crash and either never returned, or only when prices were much higher. Write the plan down – a plan put to pen and paper is much more powerful pre-commitment than a woolly thought borne of complacency.
Lesson 4 - be wary of central banks bearing gifts.
Central banks played a key role in the turnaround on the day after Black Monday. The problem? Since 1987 intervention has become a habit. This has facilitated an era of excess and bubbles. It has also prevented the creative destruction which enables a renewal within the capitalist system every few years. The central bankers are now conducting a global financial experiment. This is much more scary than 1987.
Lesson 5 – be wary of complacent commentary – focus on the differences
Lazy commentary will focus on the lack of similarities between 1987 and 2017 – “it’s not like 1987 now, so everything is fine in 2017”. Yet the worry lies in the differences – these are scary. More on that here
1987 vs 2017