How shipping and finance industry make the same mistakes…(buy high and sell low)

A reent NBER paper analyses the shipping industry. It is by Robin Greenwood and Samuel Hanson of HBS.

In the recent HBS Working Knowledge section, the authors discuss the paper. They show how shipping industry never learns from its mistakes. It overbooks ships during booms and then ends up paying for the losses in busts. The times are never different.

Like investing in a mansion when the real-estate market is at its peak, buying a dry bulk ship in a boom time is a terrible long-term investment, according to new research that predicts cycles in the shipping industry.

The contrarian research results out of Harvard Business School could help investors succeed in volatile, cyclical markets as far ranging as real estate, high technology, and truck transport. In Waves in Ship Prices and Investment, a National Bureau of Economic Research working paper, Professor Robin Greenwood and Assistant Professor Samuel G. Hanson studied trends in the bulk shipping industry, constructing patterns of return for investors.

The research results—that heavy investment in a boom depresses future earnings—were unexpected, says Greenwood, the George Gund Professor of Finance and Banking. “We were shocked at how predictable the returns are in this industry.”

It is not about shipping alone:

The bulk shipping boom-bust trend offers sound advice to investors.

“When rates are low and when everyone else is destroying ships, you want to order them,” Greenwood says. “It’s a contrarian strategy. When everyone is ordering ships is the time you should be selling.”

The shipping and real-estate industries are, unlike the stock market, quite similar in their long-term predictability, he says. High investment typically will create a low return. “If you buy a ship in a boom it’s a terrible investment. The magnitudes are stunning.”

A group of Harvard Business School students discovered similar boom-bust trends when researching the truck industry, Greenwood says. They found that when trucking companies were expanding their supply, overall returns to the industry were poor.

So much for rise in markets becoming more efficient, tons spent on stock/industry analysis…the reality is far simpler yet complex to understand,,

One Response to “How shipping and finance industry make the same mistakes…(buy high and sell low)”

  1. Shipping | Shipping Says:

    […] How shipping and finance industry make the same mistakes…(buy high and sell low) ( […]

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