The Big Lessons of the Last Year

By Morgan Housel of Collaborative Fund

History is one damned thing after another. A war ends, a boom follows, then a crash, then an uprising, then a pandemic, a breakthrough, a new boom, a new war. On and on, from agony to awe.

A question that always arises after a terrible event is why haven’t we learned our lesson?

Financial crises keep happening, again and again. People have been making the same investing mistakes for hundreds of years. The same military blunders, over and over. The characters change but the plot rarely does.

Jason Zweig explained years ago that part of the reason the same mistakes repeat isn’t because people don’t learn their lesson; it’s because people “are too good at learning lessons, and they learn overprecise lessons.”

A good lesson from the dot-com bust was the perils of overconfidence. But the lesson most people took away was “the stock market becomes overvalued when it trades at a P/E ratio over 30.” It was hyperspecific, so many of the same investors who lost their shirts in 2002 got up and walked straight into the housing bubble, where they lost again.

The most important lessons from a big event are usually the broad, 30,000-foot takeaways. They’re more likely to apply to the next iteration of crisis.

Covid-19 is far from over, but we’re now more than a year into this tragic mess. Enough has happened that we can start to ask “what lessons have we learned?” If you’re a doctor or a health regulator, some of those lessons are hyperspecific. But for most of us the biggest lessons are broad.

A few that stick out:

1. Big risks are easy to underestimate because they come from small risks that multiply…. Read More