The financial crisis we’ve just experienced is a once-in-a-century phenomenon, right? The fallout and repercussions we’ve seen from the big banks, like Bank of America
According to Bob Pozen, chairman of MFS Investment Management and author of the book Too Big to Save? How to Fix the U.S. Financial System, most people’s perception is that financial crises happen once every 20 or 30 years. “What I argue in my book -- and the statistics are compelling -- is that we have more and more financial crises, and they occur in advanced industrialized societies as well as emerging markets,” Pozen said on a recent visit to Fool HQ.
In fact, Pozen says he can assure you that in the next 10 to 12 years, there will be two financial crises. He says that on average, we’re having a crisis every five or six years. However, “we don’t know when, we don’t know where, we don’t know exactly how,” he says. “These things happen regularly in the statistical sense, but not in the sense that we can predict them exactly.”
Pozen instructs us to examine the statistics. Between World War II and 1975, there were roughly 30 to 40 financial crises around the world. But between 1975 and 1995, the number jumped to more than 130. Out of those 130, at least 18 were banking crises in major industrial societies. Since 1995 we’ve seen the Asian financial crisis (1997), the dot-com crisis (2000, when technology stocks from AOL-Time Warner (now simply Time Warner
“So if you put it together, the reality is that financial crises are not a once-in-a-century and once-in-a-lifetime exception,” Pozen says. “They actually occur a lot. It’s the severity that separates this crisis.”
The thing about a financial crisis or a bubble, as Pozen points out, is that we never know when it’s going to end. Yale finance and economics professor Robert Shiller (who shared his own thoughts in a recent interview) showed persuasively in 2004 that the housing market was overvalued. But if you had sold then, you would have lost three years of appreciation. “So we don’t know when these bubbles are going to burst, but we can say now -- and this is a very important thing for investors -- if we look at the data, that people ought to shift their mind-set,” Pozen says. “They ought not to say, ‘Gee, things are going to be stable and it will only be this rare event’ ... I think if you start to see that you start to have a different perspective. Things aren’t as cheery.”
What this means for investors
Given the frequency of crises, Pozen suggests investors take a very different view of investing. He says that means taking a more active approach to investing, with an emphasis on asset allocation and diversification. That means holding stocks and bonds. It also means paying close attention to the underlying businesses to monitor their health.
Pozen also warns investors to be very careful about momentum. “Momentum is carrying this crisis, but momentum at some point gets away from fundamentals,” he says. “Then, you know it’s going to break -- you just don’t know when.”
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