A Conservative Investment Approach as Remedy for Financial Crises: Using Value Investing to Investigate the Dot-com Crisis and the Great Recession

Research has shown that major causes of financial crises, like leverage and the overvaluation of financial assets, are due to the recurring problem of excessive financial risk-taking in financial markets. This thesis examines whether using a more conservative investment approach could make financial crises less likely - and to do so, I focus on value investing as the example of a conservative investment approach. Value investing is a small, but persistent niche in the financial markets, whose core ideas are inversely correlated to some of the main causes for financial crises. It cautions against large amounts of debt, argues for conservatively valuing financial assets, and warns that humans are fallible beings that don’t always behave rational in financial markets. Using the dot- com crisis and the Great Recession of 2007-2009 in the United States as study cases, I find that there is compelling evidence that a conservative investment approach can potentially make financial crises...Show moreResearch has shown that major causes of financial crises, like leverage and the overvaluation of financial assets, are due to the recurring problem of excessive financial risk-taking in financial markets. This thesis examines whether using a more conservative investment approach could make financial crises less likely - and to do so, I focus on value investing as the example of a conservative investment approach. Value investing is a small, but persistent niche in the financial markets, whose core ideas are inversely correlated to some of the main causes for financial crises. It cautions against large amounts of debt, argues for conservatively valuing financial assets, and warns that humans are fallible beings that don’t always behave rational in financial markets. Using the dot- com crisis and the Great Recession of 2007-2009 in the United States as study cases, I find that there is compelling evidence that a conservative investment approach can potentially make financial crises less likely by reducing exposure on over-leveraged assets, avoiding overvalued assets and counter the misleading assumption of human infallibility in the financial markets.Show less

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A Conservative Investment Approach as Remedy for Financial Crises: Using Value Investing to Investigate the Dot-com Crisis and the Great Recession