Three Longs & Three Shorts

The Big Lessons of the Last Year

Author: Morgan Housel
Source: The Collaborative Fund ( )

In yet another lucid piece, this time on what should we make of our experiences, Morgan Housel shows how we often draw the wrong lessons from history and provides us a template for the right takeaways, which are usually broad than precise.
“Jason Zweig explained years ago that part of the reason the same mistakes repeat isn’t because people don’t learn their lesson; it’s because people “are too good at learning lessons, and they learn overprecise lessons.”
A good lesson from the dot-com bust was the perils of overconfidence. But the lesson most people took away was “the stock market becomes overvalued when it trades at a P/E ratio over 30.” It was hyperspecific, so many of the same investors who lost their shirts in 2002 got up and walked straight into the housing bubble, where they lost again.
The most important lessons from a big event are usually the broad, 30,000-foot takeaways. They’re more likely to apply to the next iteration of crisis.”
He highlights three takeaways. The first from his favourite subject – Risk:
Big risks are easy to underestimate because they come from small risks that multiply.
Big risks are easy to overlook because they’re just a chain reaction of small events, each of which is easy to shrug off. A bunch of mundane things happen at the right time, in the right order, and multiply into an event that might look impossible if you only view the final outcome in isolation. Math is hard, but exponential math is deceiving.
Covid is the same.
A virus shutting down the global economy and killing millions of people seemed remote enough for most people to never contemplate. Before a year ago it sounded like the one-in-billions freak accident only seen in movies.
But break the last year into smaller pieces.
A virus transferred from animal to human (has happened forever) and those humans interacted with other people (of course). It was a mystery for a while (understandable) and bad news was likely suppressed (political incentives, don’t yell fire in a theater). Other countries thought it would be contained (exceptionalism, standard denial) and didn’t act fast enough (bureaucracy, lack of leadership). We weren’t prepared (common over-optimism) and the reaction to masks and lockdowns became heated (of course) so as to become sporadic (diversity, same as ever). Feelings turned tribal (standard during an election year) and a rush to move on led to premature reopenings (standard denial, the inevitability of different people experiencing different realities).
Each of those events on their own seems obvious, even common. But when you multiply them together you get something surprising, even unprecedented.
Big risks are always like that, which makes them too easy to underestimate. How starkly we have been reminded over the last year.”
And ends with another gem on risk:
History is only interesting because nothing is inevitable.
Carl Richards says “Risk is what’s left when you think you’ve thought of everything.”
I’ve found no better definition.
The finance industry spent a decade debating what the biggest risk to the economy was. Was it tax hikes? Money printing? Budget deficits? Trade wars? Setting interest rates at 0.5% when the proper rate should have been 0.75%?
And of course the answer was none of those. It was a virus.
That’s usually how it works. Look at virtually any decade and you’ll see that the most important news story was something no one was talking about until the moment it occurred.
…Daniel Kahneman says that when you experience a surprise the correct takeaway is not to assume that event will happen again; it’s to accept that the world is surprising. The big lesson is to realize that you will again be hit by things you didn’t see coming, that no one was talking about, and that will move the needle more than all the things you expected to happen combined.”