An Ounce of Prevention Beats a Pound of Cure

29.07.2016 • Investing

From the Gowdie Letter (Australia)-

Then an old sage remarked: Its a marvel to me

That people give far more attention

To repairing results than to stopping the cause,

When theyd much better aim at prevention.

Let us stop at its source all this mischief, cried he.

Come, neighbors and friends, let us rally;

If the cliff we will fence, we might almost dispense

With the ambulance down in the valley. 

The Ambulance Down in the Valley, by Joseph Malins

Malins’ poem is about an ounce of prevention being far better than a pound of cure.

Is it better to build a fence at the top of a cliff, or station an ambulance at the bottom?

Obviously, preventing villagers from falling off the cliff is a far better outcome. Build the fence and dispense with the ambulance.

The moral of the poem is applicable to the business of investing.

Markets are continually falling off cliffs. This is followed by the obligatory post-mortem on what went wrong…and how to ensure it doesn’t happen again. But it does. The only thing different is the fall comes from a different clifftop.

The chart below was published by Dr Dan Thornton, a PhD economist. He calls it his ‘scary graph’.

Dr Thornton had a 33-year career with the St Louis Federal Reserve. On 31 July, 2014, he retired from his position as Vice President and Economic Adviser. He was an insider who now publishes opinions from the outside.

The graph measures US household net worth as a percentage of household disposable income.

There are two trend lines — one starting from a period of prosperity, and the other from a period of economic contraction.

The red trend line dates back to 1953; it includes the prosperous post-Second World War period.

The black trend line starts in 1973 — a period when the US was experiencing a particularly nasty recession…

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