Tuesday, September 16, 2008

Times like these

I'm sure the last month has been unpleasant for most people with any meaningful investments in the stock market. It has been for me. I keep trying to think of the silver lining, which is the fact that returns to capital are likely to be a lot higher once we get through this so the money you invest over the next several years should have decent returns. (That isn't a declaration that we've reached a bottom yet. Who knows. But in a slightly longer time frame, if your peak earning years are still ahead of you, the current decline in valuations may be to your benefit).

The other "flip side of the coin" concept I wanted to quickly mention in the context of all of the debate of saving this company and protecting that homeowner is that one need always keep the "parable of the broken window" http://en.wikipedia.org/wiki/Parable_of_the_broken_window in mind. Briefly, one's reaction to a window breaking is instinctively that it is bad for everyone. That isn't true because the glazier likes the business. Now.... clearly it would be better for the glazier to put a new window in a new house for someone - depreciation of capital is a loss. But it is worth thinking about fairness whenever we change rules of the game after the fact.

With regard to AIG - if they fail, that probably means better profits for their remaining competitors. With regard to mortgage foreclosures, a family that had otherwise been priced out of a market may now have an opportunity to buy the home they want. Almost everything has secondary consequences.

This is not to say that additional uncertainty is not generally costly (though the people selling hedges profit therefrom). It is not to say that the market completely freezing up isn't something to be avoided if possible. I would just note that it's easy to sympathize with those people who were "winning" and suddenly have problems - but there are frequently others who were waiting for an opportunity and this may create one for them.

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