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Lessons From the Recent Rally

Everyone looks for lessons after bear markets, but rallies can teach, too.

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Losses hurt more than the elation from similarly sized gains, so it's no wonder that most of us drop into lessons-learned mode immediately after downdrafts. Shareholders demand to know what went wrong, why, and what their fund managers are changing--now!--to address the most recent cataclysm. Fair enough. That's what happened at the end of 2008. But few of us do much soul-searching after a big rally like the one that started in March 2009.

"After the market meltdown of 2008, the most frequently asked question we received was, 'What have you learned?'" wrote Mason Hawkins and Staley Cates of  Longleaf Partners (LLPFX) in a recent shareholder letter. "Interestingly, we have not been asked about the 'lessons of 2009.' "

That's too bad, because many of the same factors that lead to severe, near-term downturns, such as market overreactions to recent news, also power rebounds. Long-term investors shouldn't upend their investment processes because of one year, good or bad. As Howard Marks of Oaktree Capital notes: "Investment performance in a single year should matter principally only to people who are going to liquidate their portfolios at the end of that year."

Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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