It seems like yesterday, but it was ten years ago. I was in the US for a conference and, on 15th September 2008, was visiting the Wall Street to check out the heart (maybe, the dark underbelly) of the global financial system.
I had just reached there after a visiting the site of the World Trade Center, which was tragically brought down on 11th September seven years ago.
Now, another tragedy was about to happen just five miles from where I was. This time it wasn’t about loss of lives but of livelihood.
Lehman Brothers declared bankruptcy and the world financial system was on the verge of collapsing. It was, and remains, the largest bankruptcy filing in the US history, with Lehman holding over US$ 600 billion in assets, supported by less than US$ 25 billion of own capital. That’s around 23-times debt to equity. In such a highly leveraged structure, a 4-5% percent decline in asset values would wipe out all capital, which it did.
Lehman’s bankruptcy triggered a one-day drop in the US markets of 4.5%, the largest decline since the 9/11 attacks. It was just the start of capitulation in global asset prices.
The Indian BSE-Sensex were already down 25% over the previous eight months. The last four months, starting September 2008, would see another 35% drop.
Think about that for a minute. If a similar drop were to occur now, the Sensex would drop around 18,000 points between now and September 2019, bringing it to around 19,500, from the current levels of around 38,000. Not just that, like in 2008, there would be hundreds of stocks that would fall over 90-95%.
Anyways, as the new of Lehman bust came in in 2008, it was shocking at how fast the house of cards that was built over the past few years was crashing, and how fast investors were losing their shirts and everything.
“They deserve it!” I said to a friend in a moment of anguish. “Trees that grow to sky often come down under their own weight,” I added, without realising that my friend was about to lose half his portfolio value too.
I had sold almost all my stocks by late 2007 (not due to an insight that it will all come crashing down, but because I needed the money then, and so a great amount of good luck), so the crash did not hurt me in a major way. But it shook me emotionally, as almost everyone I know of was badly hurt. And boy, it hurt really bad!
I saw some retirements getting postponed, some financial goals deferred, and a few personal bankruptcies. There was a sharp rise in suicides among people associated with the markets, by despairing investors and stockbrokers who wanted to seek the ultimate refuge from their losses and debt.
People had speculated hand over feet in stocks and derivatives in the previous two years, many involving borrowed money, and Mr. Market was taking a revenge on them.
I realized I was harsh in my “they deserve it” it statement, and I corrected it by silently apologizing to the people who were at the receiving end of Mr. Market’s fury.
A wise man has said that nobody deserves misery but sometimes it’s just your turn. So, while I was saved the blushes of the meltdown, I felt the pain of seeing my friends and family members lose a lot of money in what transpired after January 2008, and especially between September 2008 and March 2009.
If you weren’t active in the markets at that time, you can never understand and appreciate the pain that people experienced in that capitulation, and due to it. I could still hear the cracking and crumbling all around.
Many people I know of, who suffered in 2008, haven’t come back to the market again. Call that the lost decade! Ten long years have passed, but for them, memories are fresh as if it happened just yesterday.
On the other hand, many investors I know of, who were not in the market in 2008 and thus did not suffer the pain first hand, are part of the new gang of speculators and think trees do grow till the sky. And that, this time it’s different!
As George Santayana has said, “Those who cannot remember the past are condemned to repeat it.” The sentiment that history repeats aspires to common sense and is hard to disagree with, especially when you have witnessed that history up and close.
Ironically, history also shows that both those who do not remember (or were not part of) the past and those who do remember (or were part of) the past are doomed to repeat it. That’s so true in the financial markets.
Our brains are not wired to make us rational investors. Just rationalizing ones, as Charlie Munger would say. And then when you add the fact that we have short memories, and that the last major crisis was a decade back (oh, I’m growing old fast!), the risk of repeating old mistakes and forgetting the lessons contained therein magnifies.
I have not forgotten the lessons of 2008. I never will!
While I still risk making the mistakes that I know are mistakes (I’m human, you see), I constantly remind myself of these lessons and what may happen if I don’t adhere to them.
So, what are those lessons? Here are a few lessons that took deep roots in my mind in 2008, and that I keep reminding myself from time to time –
- The price you pay for stocks, matter. Some trees in the stock market do grow to sky, but then they come crashing down under their own weight.
- No stock is safe, as the bulls would want you to believe. There are businesses that may remain good for some time, maybe long time, but you must not attach infinite values to them. Everything in this world is momentary. So, your best bet is to just stick with quality (even that is momentary, just for longer moments). The good thing about quality stocks is that you can pay up for them (not overpay), expensive looking prices, and still do well till the underlying businesses remain good. With poor quality, most probably, you have no hope.
- Blindly banking on the market to make you rich is a dangerous belief. In fact, looking at stocks to make you rich may be a path to financial hell. I had a few friends who quit their high paying jobs as analysts to become full-time investors in 2006-07. Some of them even started managing other people’s money. Some leveraged to buy more of the stocks that were surging in prices. Most of these “risk-takers” were destroyed in 2008, and a few had to wind up their affairs and go back to their home-towns and to their family business. Getting full-time into investing, especially because you start believing you have the skill because you’ve done well in the recent past, can be dangerous. Investing, I believe, is done best when it’s done part-time. And then you need to see it as a way to keep you rich, not make you rich.
- The risk lies not in your stocks or in the market, but in yourself. So, the 2008 crisis wasn’t the culprit that destroyed investors. It was the investors’ own mistakes and greed that did them in. This may sound ego-crushing, but so be it. It’s cheaper to crush your ego yourself than wait for Mr. Market to do it.
- First calm, then complacency, then crisis. That’s the way the system works. You must not be complacent when it seems calm, like it did in the period prior to 2008. A long period of growth, with only a minor interruption in 2001, had led to complacency then. Economy looked stronger with each passing year, banks were willing to lend to everyone willing to borrow, and asset prices were rising across the board. It continued for some time, and then, hell broke loose. Seeds of future prosperity are sown in times of despair. Seeds of future despair are sown in times of prosperity. We must remember this.
- Peter Bernstein said – “The riskiest moment is when you are right.” This is because the streak of being right can make you forget how important luck is in determining the outcome. If you realize that you have been right quite a few times in the recent past, you must bear in mind the risk this entails. Most investors forgot this in 2008.
- Always invest to the level of a peaceful night’s sleep. Investing that causes you sleepless nights – for some people, their lives – isn’t worth doing. It’s like the game of Russian Roulette, where you put a gun with one bullet and five empty chambers on your head and shoot. The probability that you may survive is a huge 5/6, or 83%, but the consequence of failure is death. You become a statistic.
- Keep a healthy sense of respect for the stock market’s inherent risk. Agreed that, as Ben Graham said, Mr. Market has incurable emotional problems. But he often shows us the mirror that contains a clear reflection of the true investors we are. Never disrespect that for a fact.
- You are just a tiny cog in a massive machine. You may want to board the lift to the top floor, but you have no control over someone pressing the wrong button – like bankers and other smart guys on Wall Street did in many years prior to 2008 – on the wrong floor, or the lift crashing down. So, be humble.
- Most good decisions in life are marked by peace, detachment, and acceptance. Rising markets may lead us to ignore this. Most investors like to believe they can enjoy stock market gains without losses. And that denial is what causes them stress and conflict. They feel disappointed when the harsh reality doesn’t align with their rosy expectations. And then, such investors feel helpless, which further magnifies their disappointment. After all, most of what happens in the stock market are outside of our control. We can’t stop the market from falling and crashing, nor can we call up companies or the stock market regulator or the central bank when our stocks tumble. Making and losing money is just the nature of investing, and often outside your control. So just do your work well, and then let it go. Yes, let it go.
Courtney Peppernell has written this nice book titled Pillow Thoughts, that contains this thought –
You can’t skip chapters, that’s not how life works. You have to read every line, meet every character. You won’t enjoy all of it. Hell, some chapters will make you cry for weeks. You will read things you don’t want to read, you will have moments when you don’t want the pages to end. But you have to keep going. Stories keep the world evolving. Live yours, don’t miss out.
When you are investing in the stock market, you will have periods that you don’t want to see the end of (when your stocks are rising), and you will have periods that you would rather want to be erased from your memory (when your stocks are falling). But if you are in the markets for long, you get appreciative of the fact that that’s how it works, in cycles. Also, humble that you cannot sidestep the same, especially the declines.
Like, you could have done everything right going into 2008 when the decline started and still lost a large amount of money over the next fifteen months.
But then, to do well in investing over the long run, all you must do is the hard work of finding high-quality businesses at reasonable prices, and then keeping them through the cycles and till they remain high-quality. That’s the way wealth is created.
Santayana said of human nature, “Only the dead have seen the end of war.” I must say only the dead have seen the end of financial manias, panics, and crashes. For those alive, when these come next is anyone’s guess.
All you can do is do your work well and be prepared for the next major crisis. It would come. That’s natural, and good, for the markets. But when? No one has any idea.
For now, I will go back to thinking about 2008, as it changed my life in a big way, and because it seems just like yesterday.