Reminiscing the financial crisis is dangerous

By | September 17, 2018

In the past week, almost all major news outlets are publishing their “10 year” series: 10 years since the collapse of Lehman Brothers, 10 years since the past financial crisis etc.

It was probably nice to write those events into history textbooks and read about them once in a while. However, I have to remind investors that such time spent is probably generating the least return on your “capital”.

  1. It leads to overconfidence

Why? Because in hindsight, your vision is always 20/20. You may think that you have seen it all. You may think that should it happen again, you will plunge all your personal liquid financial assets into an awesome company’s stock and watch it rebound 3 or 4 times over a span of 8 years after that.

The truth is, human beings are normally overestimating their ability to making rational choices at that situation. It is well possible that (if you haven’t experienced such situation), when the S&P 500 index is dropping 2-3% over a period of hours, your positions in the market tanked 1/3 of its value, your palms are sweaty and your knees are weak. Your heart is pumping too fast that you need to sit down.

If you are watching the faithful day in March 2009 when all indices dropped almost 10% before rebounding, from today’s cozy bull market environment, sitting in a sofa sipping a cup of expensive coffee from Blue Bottle, chances are you won’t really imagine how you would have responded in that moment.

Overly indulging those moments today is nothing helpful in terms of simulating and training your mind to prepare for an event like that.

All those articles do, are mostly triggering some nostalgia feelings and nothing more (get some clicks for the article and ads revenues from asset managers). If tomorrow similar market crashes happen, people will respond probably the same (if not worse, because today it is more convenience for people to “DO SOMETHING” in that situation). In fact, the best course of action is exactly the opposite: don’t do anything, sit tight.

2. It leads to over-fitting

Over-fitting is a statistics term. It means that you may use some thin sample to fit a hypothesis with a perfect equation.

For example, if you have 3 equations to solve three variables, as long as such equations all bring in some new information, you can solve each of the three variables mostly.

So if you have 3 data points to solve what are the reasons behind these three, you may easily end up with a perfect formula for such three points.

Therefore someone is claiming that they know when and where next financial crisis will happen.

That’s over-fitting. Some articles wrote about the financial crisis as if they have figured out the true reasons behind and they found plenty of signs today that a forecast can be made. Most likely you can stop reading such articles because the information provided about the crisis is zero (it probably provides lots of information about that person behind the article though).

3. It leads to wasting your precious life, today

Life can only be lived forward. Your best resources is the hours in your life. An hour spent on some gossipy useless articles is an hour wasted not to improve your true investment skills, or an hour not on hugging your loved ones or an hour not spent outdoor running to improve your physical body or an hour not to read some deep thoughts or higher quality publications.

Such reminiscing of the past can give you some talking stock at dinner parties, but it fails to give you a true accountability on what actually happened and how to prevent it from happening again. Skip the fast food for the mind. Stick to the whole foods, which may taste a bit plain for near term, but will benefit your health (mind and body) for years to come.

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