I recently re-read John Kenneth Galbraith’s book “A Short History of Financial Euphoria”. While it was published in 1993, it is as valid today as it was then. It is a quick read with at 110 pages of larger print.
Forgetting history is a sure way to get into trouble. Galbraith goes back over several hundred years and discusses the causes of major financial downturns and the circumstances surrounding them.
One of the major causes of downturns is the lack of memory of what happened in history. How quickly we forget! Leverage (or gearing as the English say) is always involved. A new generation comes along who is unaware about the lessons of the past and has the epiphany of the use of leverage.
Things to think about are the widespread use of leverage by corporations today who are taking on high debt/equity ratios and private equity’s pervasive use of leveraged buyouts. Much financing is being done by “covenant light” bond issues and being purchased by investors running from the equity market into bonds while seeking safety.
“When will come the next great speculative episode, and in what venue will it recur – real estate, securities markets, art, antique automobiles? To these there are no answers; no one knows, and anyone who presumes to answer does not know he doesn’t know. But one thing is certain: there will be another of these episodes and yet more beyond. Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by the sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.”
- John Kenneth Galbraith
“What we learn from history is that people don’t learn from history.”
- Warren Buffett
Reading is fundamental!
