History Repeats Itself: Don’t Be Surprised, Be Prepared

This week Canadian banks begin reporting their annual and fourth quarter results which will spark speculation and fluctuation in the markets.   As 2011 winds down positive results will be welcomed with open arms.   Don Vialoux for The Globe and Mail online writes, “Strength is related to anticipation of good news” discussing the early December reports that share such information as dividend increases, share splits and news for the coming year. In most cases rational thinking prevails; do your homework, run the math and make an informed decision. However there have been times when speculation, rumor and guesswork have trumped the market fundamentals. Those who cannot remember the past are condemned to repeat it. There are parallels with past events aligning with events of today: the 1973 oil crisis brought on by the Arab oil embargo, the economic depression of 1893 sparked by poor banking habits that financed the construction of railroads and, my favorite, Dutch tulip mania of the 1630’s. Tulip mania “was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed.  At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman”. The fad of new and exotic blends of tulip bulbs had people buying, trading and selling the product without having ever seen their purchase.  Eventually the ‘tulip bubble’ burst, as all bubbles do, and those stuck on the tail end were left owning tulip bulbs worth a fraction of what they paid for them. There are several recent examples of “mania”.  The housing bubble of the 2000’s, which helped ignite the current financial crisis, as home owners believed that real estate prices could only rise as they continued to leverage their homes – in the end over leveraged.  The 1995-2000 dot-com bubble is another instance that was characterized by the rapid growth of online companies following the internet boom; stock prices were being based on wishful thinking rather than reality. What lessons should we learn?  They are always the same:

  • When something sounds too good to be true, it usually is.
  • When somebody is getting something for nothing, someone else is usually getting nothing for something.
  • When everybody is running in one direction, take a moment to look around and ask ‘why?’
  • History always repeats itself, although never quite the same, there’s usually a common thread.

| Raymond Matt, CFP, CLU, TEP, CHS

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