"History does not repeat itself, but it does rhyme." Mark Twain (1835--1910)
Read these two selected excerpts from a Businessweek article I read this morning. The most telling point will follow...
"Nearly every major investment house and bank in the U.S. and abroad has a group of highly paid rocket scientists in its proprietary trading department trying to beat the market with complex, computer-aided trading strategies..."
"August may go down as a watershed in the history of high-tech investing. That's because the losses suffered weren't just financial: The reputation of quantitative investing itself has been dealt long-term damage..."
The article, Failed Wizards of Wall Street, comes from August 1998, not August 2007...
I'll have more to say on the subject in my forthcoming "Weekend Wisdom" post but this just solidifies the folly of human behavior that I just commented on this morning. Our brains are "wired" to look for patterns and make predictions based upon those patterns. The problem is that most of us tend to allow our emotions step in front of our best judgment or, even worse, allow something that is not capable of making a "judgment," such as a computer, make decisions for us...
The chilling "rhyme" of history is that lessons from the past begin to fade as fear is replaced by complacency, which is then replaced by greed. It just takes at least one full market cycle to occur. The Goldman Sachs quantitative hedge fund mess is not the last we'll see of this kind of behavior. I imagine we'll see it again soon or perhaps near the end of the next cycle several years down the road...
I have a few more observations to make on this subject but, thus far, I am convinced that the only "pattern" that investors should note is that "patterns" fail -- especially when blinding emotions are involved. How long have we known this? Centuries? Millenniums?
TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.
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