A Short History of Financial Euphoria – Book Review

Yep… I read a book. I don’t read a ton of books or listen to a ton of podcasts. When I do read, I try to read something that isn’t as well known and not popular in the investing community today.

The book is written shortly after the crash of 1987. It goes through the biggest financial busts in history. All the way back to the Tulip-mania to the South Sea Bubble to the Crash of 1929. I found it almost therapeutic to hear the stories of the previous generations making similar mistakes with a slight twist. Each boom and bust a little different than the last. The commonality is the current generations belief that their version of financial engineering is better than the last. It’s absolutely fascinating how humans can make such similar mistakes and not learn. I can’t help but think of the current Cryptocurrency and Blockchain mania. Some of the characters presenting investment ideas make my skin crawl. And the ones that don’t are bursting at the seam with dissonance. But I digress…

My favourite passage from the book:

Let it be emphasized once more, and especially to anyone inclined to a personally rewarding skepticism in these matters: for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius. Thus impressed, it becomes bemused by the two further influences operating in this world that are greatly seductive of error. The first, as sufficiently noted, is the ease with which any individual, on becoming affluent, attributes his good fortune to his own superior acumen. And there is the companion tendency of the many who live in more modest circumstances to presume an exceptional mental aptitude in those who, however evanescently, are identified with wealth. Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self- and general delusion.

I have only been at this investing thing for 10 or 11 years, but I can count some minor and major bubbles in my short experience.

  • US real estate
  • Hard Commodity “Supercycle”
  • Emerging Markets
  • Precious Medals due to USD weakness and something about a fiat currency or gold standard or Chinese buying or something
  • Rare Earth Elements – some of these turned out to be good investments
  • Platform companies
  • Anything Saas
  • Crypto things
  • Canadian Real Estate, particularly Toronto and Vancouver – TBD I guess

The takeaway is to avoid getting swept up in these bubbles. It’s simply amazing how much wealth you can generate if your winners compound at 20% for several years and your losers only cost you 10-15%. The net return over 20-30 years (as long as you start with a decent slug of capital) is enough to finance a modest retirement.

The book is relatively short and quite easy to read. I would recommend it to anyone interested a quick history lesson on our previous mistakes. I think it is a good book for someone who has just gotten interested in growing their capital and is willing to learn from others.

 

Dean

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