Why do we keep making the same mistakes? From one bubble to another…

Almost everybody knows a person who is in a less than ideal relationship and who says to themselves ‘why do they stay with that person?’. There is no simple answer, but then again, how can we be dumbfounded in particular when we suffer the same delusion in general?

You see, the same problems haunt us with shocking regularity, one such thing is housing boom bust cycles. Another is public spending getting out of control (and subsequent debasement of currency), yet another is periods where we find hate figures which take on a national importance and then become the subject of actions people are collectively ashamed of.

Property boom-busts have been traced back hundreds of years by economists like Fred Harrison in the UK, and even further back (periods of inflation in particular) by historians like David Hacket Fisher who studies ‘long wave price revolutions’. Even in Ireland we have the likes of Anton Murphy (retired from Trinity) who is perhaps the most under-quoted economist, and a man who has written about various bubbles all of his professional life.

If we know that bubbles form time after time, be they land during a gold rush, the Celtic Tiger, tulip bulbs or otherwise, then why does it happen more than once? The only solution I can come up with – and this is after years upon years of trying in vain to figure out the underlying driver, is a mixture of greed and group behaviour.

The famous investor Warren Buffet described it better than I can “People don’t get smarter about things that get as basic as greed. You can’t stand to see your neighbour getting rich. You know you’re smarter than he is, but he’s doing all these crazy things, and he’s getting rich…so pretty soon you start doing it.”

And that my loyal readers is the nub of it, we foolishly follow where others lead, Robert Shiller wrote a book called ‘Irrational Exuberence’ which spoke about the housing crash (in the USA) so well that you’d think it was written AFTER the fact.

So what has that got to do with your money? Pretty much everything. You see, whatever you are reading about now that is meant to be a ‘great investment’ probably isn’t, it probably carries too many risks which is why I think it’s important to do a few different things.

The first is to diversify, invest in different types of assets, don’t go all in to only one type (and that goes for stocks, bonds, property or otherwise), and to avoid herding. For instance, how many people say property is a ‘good buy’ now? Very few, that is precisely why I think that it is a good buy, yields are high, rents are showing upward momentum and virtually everybody is afraid of the asset class.

That is something that the masters of investing inherently know, it is that you snap up bargains in the unloved asset classes that other people are shunning, because there is often unrealised value in them.

Equally, you don’t want to do this in a foolish manner, so I wouldn’t be ploughing any money into Irish bank shares.

The cycles that I mentioned already have expected life times, for property it is 18-20 years, with a mini boom/bust about half way through – which means we should expect one in c. 2016-2018 or there abouts with a mania phase from c. 2019 to 2025(ish).

That surely couldn’t happen again could it? Of course it could, and it will. And in the same way we’ll have stock market crashes where few are reliant on history to guide them to the turns and where many over invest in one ‘hot’ sector (think dot coms back in the late 90’s).

With unending money creating there is likely going to be upward pressure on all sorts of asset classes, but just remember, when the rug is eventually pulled out from under these asset classes – as it inevitably always is, will you be able to survive the turmoil? That’s the real question.

Because out of the dotcom boom-busts we still got Amazon, after tech was out of fashion Google rose to dominance, and Apple became one of the worlds largest companies after being nearly eradicated in the 90’s!

I can’t stress this enough, pay attention to what you invest in, learn all you can about it, don’t be lead by sales people, don’t be driven only by greed or get some moderate success and think you are now a jedi at your chosen field. The long term successful people know their limitations, they know what they don’t know and that is as important as taking measured risks to begin with. Tread carefully, but the smarter you are on a topic the quicker you can walk on that journey! Happy investing.

This article appeared in the Mr. Money column in the Sun on Sunday 12th May 2013 (this version is unedited)

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