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Depression babies

Recently I’ve been seeing a number of posts/articles talking about the dot-com bubble. It seems to be driven by talk of a pending crypto bubble. 

Whatever the case may be, the recounts are interesting. In this one by venture capitalist Fred Wilson, he talks about how 90% of his net worth went to zero following the crash. And the only reason it wasn’t all of his net worth was because he was fortunate enough to sell some tech stocks in advance of the crash to buy “two significant pieces of real estate.” The two properties were 10% of his net worth before the crash and 100% of his net worth after the crash.

Fred goes on to talk about how he had to learn about diversification the hard way. And this reminded me of a theory that many of you are probably familiar with called “depression babies”. This is the belief that large macroeconomic shocks – such as the Great Depression and the dot-com boom – create a lasting impact on people’s propensity to take financial risks.

And indeed, there’s evidence to suggest that this is in fact the case. In this 2010 paper by Ulrike Malmendier and Stefan Nagel, they came to the following conclusion: “Our results show that risky asset returns experienced over the course of an individual’s life have a significant effect on the willingness to take financial risks.”

I often think about this with respect to my own career. I started working in real estate before the 2008 financial crisis. I also happened to be living in the U.S. at the time – where it was far worse than in Canada. We got off easy. I remember seasoned real estate professionals telling me that it was going to take at least 20 years before the U.S. would build another commercial office building. It was that bad. And that was the sentiment at the time.

Of course, that wasn’t the case. It didn’t take two decades to resume building. But I like to think that 2008 will remain permanently etched in my mind. It’s my reminder that crashes can and will happen. Don’t forget that. Stay disciplined. At the same time, it’s my reminder that these periodic crashes create opportunities. Because fear invariably makes us overshoot the mark.

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