Investors have by and large lost an essential protection against financial pain, whose absence will likely intensify the effect of the next financial crisis.
That is the warning of Tocqueville Asset Management founder Francois Sicart, who illustrates his point with a simple 36-year chart of U.S. interest rates.
The three-and-a-half decade long bull market in bonds means that most market participants have no professional memory of rising interest rates.
“They may have read about such periods and even studied them in school, but they have never actually experienced the pain that results from them,” the veteran fund company manager writes in his latest letter to shareholders, which he titles “The Discovery of Ignorance.”
Sicart cites the conclusion of Israeli historian Yuval Noah Harari, author of the bestselling “Sapiens: A Brief History of Humankind,” that the most important discovery of the 16th and 17th century scientific revolutions was not confined to any specific law of nature or invention but rather the awareness of human ignorance — the rejection of the previously held assumption that all that there was to know of importance was already known.
Applying that insight to the world of investing, Sicart warns that a similar ignorance is handicapping investors because, he argues, experience teaches that the critical ingredient of survival is, well, experience.
The intellectually oriented fund exec cites a recent article in the January/February issue of Foreign Affairs by Nassim Nicholas Taleb — of “black swan” fame — and Grergory F. Treverton that compares the recent experiences of Syria and Lebanon.
Despite its reputation, Lebanon experienced less violence than Washington, D.C., in 2013, a year in which Syria’s death toll exceeded 100,000. Why has Lebanon achieved stability while its close neighbor spirals out of control?
“Countries that have surived past bouts of chaos tend to be vaccinated against future ones,” Sicart summarizes.
Applying the principle, he extracts insights from investors with documented long-term records such as Peter Lynch and Warren Buffett and economists who correctly anticipated past financial crises, like Hyman Minsky and Taleb.
The former call economic forecasting futile.