August/September 2010 Comment:

When the financial crisis began to take its toll on the United Kingdom in 2008, Queen Elizabeth at a meeting with financial analysts asked the logical question: "Why didn't anyone see this coming?" Though directed at the London financial community, it could have just as easily been put to the mainstream media, academia, the politicians, or the regulatory apparatus of the government. The answer she received would soon become standard fare: "No one saw this coming." The implication, of course, was that if no one saw it coming, then no one reasonably could be held accountable.

For countless private investors on both sides of the Atlantic Ocean, Queen Elizabeth's question prompted a more personalized assessment: "Why," they asked their financial advisors, "wasn't I advised that this might be coming?" For those completely honest with themselves, the question reduced to "Why didn't I see this coming?" After all is said and done, each of us is responsible for the stewardship of our own portfolios, and to blame anyone else is pretty much an exercise in both futility and passing the buck.

At the height of the stock bull market in the late 1990s and early 2000s, too many investors forgot that a healthy skepticism was part and parcel of a successful approach to the market. Unfortunately, that loss of focus contributed to millions believing the utopian mantra that markets and the economy no longer cycled (the Goldilocks economy), that we were on a one-way street to perpetual prosperity (the end of history argument), and that the stock market would never falter again. Such unmitigated positive thinking cost investors trillions during the subsequent stock market meltdown and credit crisis.

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