The most popular version of “It Was a Very Good Year” featured Frank Sinatra crooning an aging man’s recollections of the high points of his romantic life.  Investors commonly reflect in a similar fashion, remembering those years that came together in a way to produce the returns that are worth savoring (and living off of) into the future.  In years to come, 2008 will be recalled by relatively few as a very good year.

Certainly the owners of long Treasury bonds will be able to fondly consider the benefits of being in the last asset class standing, and while those hunkered down in cash are now bemoaning their decline in income, avoiding the calamities that were all about will elicit good memories for them in the future.  The speculators who acted quickly to reap the rewards of the unwind can similarly expect pleasant memories of what, for most, was annus horribilis.

Just as there are dangers in looking forward,the research puzzle | The last posting I did in 2008 was about the “fortune tellers” who deign to predict the market’s path for us. there are problems looking backward — our interpretations of events can be distorted, especially difficult ones that caused real economic and emotional pain.  As hard as it is to admit, in some respects there was good created out of the bad of last year.

The investment business was sorely in need of shaking up.  The industry grew dramatically for a quarter of a century with very few interruptions, and it was overbuilt, bloated, and hidebound.  The sociology of the business is such that it is too often best at synthesizing and institutionalizing easy answers, and worst at considering plausible contrary views; the wreckage was inevitable.  While investment professionals are facing tough conditions right now, the nimble and creative will thrive going forward by finding new ways to invest, run their businesses, and, most importantly, meet the needs of their clients.  The culling of those who cling to discredited approaches will ultimately be beneficial for the health of the industry.

The other important benefit is that significant opportunities have been created by virtue of what Jim Grant has referred to as the “great value restoration project.”  You can’t close your eyes and buy something just because it has gone down significantly, but 2008 was very good at creating for us an environment where prices have been slashed, economic conditions are volatile, and nothing can be taken for granted — a perfect situation for those with sound research processes and the inclination to take prudent risks.  In addition, as I wrote a couple of months ago,the research puzzle | In “the famous nine percent,” I explored our expectations for returns on stocks over time. we now have a greater chance to attain the respectable rates of return that during the last many years had been often promised but in fact were quite unlikely to be achieved.

“It came undone,” sang Sinatra, with the lyric being about something else entirely, but that is surely what happened in 2008.  The time to see the good in it is now, when competitive advantage accrues to those who can recognize it and capitalize upon it.