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New Year, Old Cycles
In a similar way, the latest credit crisis illustrates this idea of permanent, recurring themes in the human experience; in this case, the themes of greed and envy, and their destructive spawn: financial bubbles. From tulips in the 17th century to gold in the 19th, from automobile stocks to airline stocks, and tech funds to hedge funds -- whenever you dangle the possibility of easy money in front of human eyes, you'll see this story.
The promise of high returns stokes the fires of greed and envy, and attracts an overabundance of cash, inflating whatever asset is the current "player" of the moment, driving up prices to unsustainable levels and removing risk from the intoxicated brains of the giddy investor.
This is not the last we'll see of this story. Just as the next generation will repeat the experiences of the past one -- growing up, trying to find their place in the world, striving, failing and then striving again -- so, too, will be another set of investors to repeat the boom-to-bust story of the financial world.
It's not as if in 30 years, when the next generation of financial participants gets seduced by the returns of a new financial instrument, they're going to sit around and say: "Hey, do you remember the subprime credit crisis of 2007? Aren't we repeating the same mistakes now?"
And one of the reasons for this lack of perspective will be that many of these future players are now only 10 years old.
You can read about financial bubbles in your textbook, but until you have experienced one yourself -- and watched your or your client's assets take a dive off a cliff like the coyote from "The Road Runner" cartoon (beep-beep) -- you haven't gained the wisdom that only pain can deliver. Every generation will produce a set of people who will believe the timeless phrase: "It's different this time."
The paradox is that it's never really different. It's the same phrase, just uttered by different people.
During the Yom Kippur service, we read: "Birth is a beginning and death a destination, and life is a journey: from childhood to maturity and youth to age; from innocence to awareness and ignorance to knowing; from foolishness to discretion and, then perhaps, to wisdom."
To paraphrase this famous passage and apply it to fiscal history: From tulips to gold to airline stocks to electronics; from real estate to tech stocks to hedge funds to private equity, and, then perhaps, back to tulips -- as long as human beings remain human, and the eternal themes of greed and envy persist, financial history will never be without the emergence of financial bubbles and their inevitable puncture.
The lure of easy money has a very, very strong appeal -- in some cases, and with some people, even stronger than the bonds of love, the desire of sex and the intensity of hate. Ignore this feeling in yourself at your own peril.
By all means, take a risk, but if you can't stand the idea of someone making more money than you, you might want to consider putting all your cash in treasury bonds before you place it in a financial instrument that evaporates into thin air.
And let us say: Amen.
Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management. For more information, go to: www.prudentmanagement.com.