Excesses lead to greed; greed leads to euphoria; euphoria leads to losses.

Each new financial crisis brings with it scar tissue and near-death experiences for many investors. But lessons are not always learned. Not all crises are remembered equally. My grandpa has been a successful man - an advertising fellow from the old era; a Don Draper; a high flying advertising exec, and the reason you put Grey Goose Vodka in a Martini instead of the Russia stuff. He has compounded his financial success over the decades. That success is, of course, a product of his tireless hard work, but also attributable in part to an event that greatly affected his personality - that event was the Great Depression, forever be it stamped on his psyche. People of his generation understand there are two ways to be wealthy: make a lot of money, or don't need a lot a money. His conservative lifestyle amidst his objectively high net worth by any measure (he owns several houses in affluent suburbs of Melbourne, Australia for instance, and hasn't had a dollar debt since the 1960s) is - in my view - lessons learned and never forgotten, manifested. My favourite example of his conservative living: he treats himself to an occasional beer at night, and his poison of choice: TUN. It can be picked up for less than $0.25c per can, and he drinks it at room temperature - refrigeration costs money after all. For his generation, memories of tough times coloured their every behaviour, leading to limited risk-taking and a sustainable base for healthy growth. New generations are different. One year after the 2008 collapse, for example, investors had returned to shockingly speculative behaviour. Given the recent global economic impact of COVID-19 - and those impacts that are yet to come - it is worth highlighting the lessons that could and should be learned from the turmoil of previous financial crises. Some of them are unique to the 2008 meltdown; others, which could have been drawn from general market observation over the past several decades, will certainly be reinforced in the coming year. Losses and lessons learned from previous crises to follow:

1. Risk is always relative to the price paid, it is not inherent to any investment. Uncertainty is not the same as risk. When great uncertainty drives asset prices to especially low levels, they often become less risky investments.


2. False senses of security are self-perpetuating. The worst loans are written at the best times; when lax lending standards become widespread and persist, people are lulled into a false sense of security, creating an even more dangerous situation.


3. When excesses eventually end, they trigger a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.


4. The latest price of an asset creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance.


5. Ignorance is bliss; this is truer nowhere more than the vestibules of the credit agencies. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.


6. Illiquidity without control creates a particularly high opportunity cost; ensure you are compensated for your illiquidity.


7. Beware leverage in all its guises. Mismatched duration is a silent assassin. It is never safe to assume a maturing loan can be rolled over.


8. If unlevered, be aware that the leverage employed by others can drive dramatic price and valuation swings.


9. Credit rationing in the economy may trigger an economic downturn.


10. Be prepared for the unexpected and the unpredictable, including sudden, sharp downward swings in markets and the economy.


11. Irrespective of the scenario contemplated, expect that reality can be significantly worse. Expect events that have never happened before to happen with increased regularity.


12. Avoidance of permanent impairment to capital must be the principle concern. Consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables the maintenance of long-term oriented, thought without noise, and clarity while others are distracted and panicking or forced to sell. Hedges must be in place before a crisis hits as it is unaffordable to increase or replace hedges that are rolling off during a financial crisis.


13. Trust not, the financial risk models. A model can be correct, or useful - but not both. Reality is always too complex to be accurately modelled, thus by definition, a useful model is one that simplifies. Markets are governed by behavioural science (a wholly inexact science) despite the predilection of some analysts to model the financial markets using sophisticated mathematics.


14. The concept of private market value as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times. It should always be considered with a healthy degree of scepticism.


15. A flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed.


16. You must find the courage and conviction to buy on the way down. There is far more volume on the way down than on the way back up and far less competition among buyers. It is almost always better to be too early than too late, but you must be psychologically prepared for price markdowns while you hold towards the bottom.


17. Beware of financial innovation. New financial products are synonymous with good times; seldom are they tested against the bad times. Securitisation is the perennial example - markets for securitized assets such as subprime mortgages completely collapsed in 2008. Pay no attention to a government official says a problem has been contained.