On his blog, Paul Kedrosky highlights this quote from the most recent issue of Barrons, suggesting that housing market bets extrapolating from the historical pattern changed the odds and motivated the pattern to break down:

…One of the great lessons [of investing] is beware of platitudes, such as "There has never been a national decline in home prices." If you believe that there has never been a national decline in home prices and that there never could be, then you bid home prices up to levels that don't allow for the risk of widespread losses, because you concluded it could never happen. Then the fact that they are at those new high prices introduces, in itself, the risk of a national home-price decline. So the actions of people relying on history change history, and that is what people lose track of…

Flashback: Cliff Asness applied a parallel notion to the stock market a decade ago:

…Imagine all stock prices went up 100x tomorrow with no change in fundamentals. Hopefully, we would all agree that paying about a 3000-4000 P/E for the S&P 500 right now would make a very poor long-term investment (wow, a P/E that even the author's of Dow 36,000 would not love). However, the historical average return on stocks would skyrocket once this 10,000% return was added. Obviously, in this case it would make little sense to use the historical average to forecast the long-term future. The historic average would be incredibly high, and the future would look incredibly poor. While far less extreme, the real-life situation today is analogous.

And Robert Bacon on horse betting: "…The principle of ever-changing trends works to force quick and drastic changes of results sequences when the public happens to get wise to a winning idea…"





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