All of these paragraphs highlight errors made by investors this time around . . . of a type

that always will be made (but with variations on the theme). The lesson isn’t to distrust

managers, or models, or ratings, or diversification, or market efficiency.

What investors must learn – but most will not – is that there’s no easy answer,

surefire tool or silver bullet. Lots of tools will help when applied thoughtfully, but

they’ll bring harm otherwise – with the additional risk that excessive reliance on them

will increase the damage done when they turn out to be unavailing. Certainly none of

the highly-touted things discussed above held the answer this time around. Only

truly superior skill, discipline and integrity are likely to produce consistently high

returns in the long run with limited risk.

My advice: expect CEOs, regulators, rating agencies and other market participants to

make mistakes. Expect things to go wrong and cycles to swing to extremes and then

recover. Worry about outcomes, and hire worriers. Doing these things is sure to stand

between you and top returns in up-cycles, but it will deliver some degree of safety when

things turn bad. Ensuring the protection of capital under adverse circumstances is

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incompatible with maximizing returns in good times, and thus investors must

choose between the two. That’s the real lesson. The things discussed above are just

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a few of the details.

What Next?

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Lots of people are asking whether this is going to get ugly. Is this the beginning of a

credit crunch? Will it lead to a recession? How bad will it get? When will the bottom be

reached? How long will the recovery take? The answer’s simple: no one knows.

Some of the psychological and technical preconditions for a challenging market

environment have been met. The bubble of positive investor psychology has been

pricked and could become seriously deflated. When others are aggressive, we should

be worried, but when others are worried, we can be confident. That’s the essence of

contrarianism, and by that standard these are better times.

The easy-money machine has had some sand thrown in its gears and seems to be grinding

to a halt. Previously, anyone could get any amount of money for any purpose. Right

now, deserving borrowers are unable to obtain financing, and this could continue or get

worse.

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