Last week we tried to identify some general lessons learned by investors during the market convulsion of the last year. Now let's try to figure out who the winners and losers were. You may think you know, but I'm betting you'll be surprised by the result.
If you thought the best thing to do was to own riskless U.S. Treasury bonds, you're wrong.
If you thought the best thing to do was to get out of the sinking U.S. stock market and into the soaring Chinese one, you're wrong again.
So what was right, and how do we know?
We have perfect hindsight on the crisis now. It's a simple matter to pick the one investment that fell the most and then rose the most, but all that will tell you is what would have happened if you'd been incredibly smart, or more likely, incredibly lucky. That won't do at all.
Instead, we need to admit that in the fog of crisis no one knew exactly what to do. We have to judge the performance of various investments by the criteria of our honest ignorance. We need to figure out which ones did the best even if we didn’t have perfect timing. And just as important, because risk is just as critical to performance as return, we need to figure out which ones did the least bad just in case our timing was lousy.
Here's how you figure out which ones did the best without perfect timing. First, you define the period we're going to think of as the crisis; let's say it's from the beginning of July 2007, when Bear Stearns' early troubles first started to roil the financial markets, through yesterday.
All you have to do is see which investments are at all-time highs for that crisis period or, if none are, which one is closest. Of necessity, any investment that is now at all-time highs has no losers no matter when anyone bought it. After all, all possible prices in the past are lower than today's price. Everyone is a winner.
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