I admire Morningstar for its January 16 confession, an article on its site entitled Our Biggest Mistakes of 2008. To err is human. To forgive is divine. To learn is even better. Unfortunately, from reading the article, I suspect Morningstar may have missed its biggest mistake: too much youth and too little experience.
Morningstar cited seven lessons which, however new they may have been to the author of the article, are old hat to anyone who’s been around the block a few times. The numbered subject headings below are quoted directly from the article.
- Watch Out for Correlated Risks
This lesson comes as a great surprise to present and recent students, but it’s business-as-usual to market veterans, many of whom are well familiar with the adage “In times of crisis, all the correlations go to 1.00.” This isn’t simply a cute saying. It’s fundamentally inevitable.
The normal state of affairs for a healthy market is disagreement. After all, every transaction has someone who thinks it’s smart to buy, and someone else who thinks it’s smart to sell. Price movement occurs when there’s more of one than the other. But as long as there’s a reasonable body of opinion on either side, we’ll have healthy, liquid markets.
Such difference of opinion does not occur because one person is smart and another person is dumb. Although it’s fun for pundits to suggest Wall Street is an ignorant mob, etc., the reality is that most people in this arena are at least competent and many are downright brilliant. Disagreement is normal because the world is an incredibly complex place, one in which reasonable arguments can be made for both sides of a question.
Things change in times of crisis. As conditions become more extreme, it becomes harder and harder to justify one side of
