Five years after the housing bubble popped and three years after this century’s worst financial crisis, we’re still seeing the imbalances in our economy trying to sort themselves out. Meanwhile, as we watch housing prices continue to weaken in most parts of the country, shoddy reporters continue to tease worried consumers with useful sounding headlines, only to disappoint with incoherent analysis that needlessly stoke fear.
Anybody can regurgitate an endless laundry list of possible threats. We can all do that ourselves until we scare each other into quivering balls of abject fear. (Heck, it’s possible that cultish doomsday predictions are right and the world ends in 2012.) But, that does none of us any good. What we really need to discuss are the probabilities of each likely scenario and plan accordingly. As I’ve discussed in my prior blogs, we need to do actionable analysis that allows us to profit or protect ourselves in any situation.
We can take a lesson from Wall Street. The big private fund managers there are basically financial hired guns whose sole task is to perform
rigorous scenario analyses and place smart bets for the wealthy. Even for them, there are no guarantees. Sometimes they’re right and sometimes, like we’ve just seen in 2008, they get cleaned out too. But, on average, they do better than the rest of us.
So, as we trying to work out how to position our investments, we’ll need to think far beyond the “possible threats”, “could be’s”, or “may be’s” offered by lazy reporters, especially those who rely on textbook interpretations of microeconomic relationships. The real world rarely, if ever, graces us with such mathematical elegance.