September 2008 – The Month I Will Never Forget!
Part 6 – “Lessons Learned”
By Keith Albritton
Whether you read all, one or none of the first 5 articles, perhaps this FINAL article is the most important. I truly hope you have enjoyed the series on the Financial Crisis, however, without learning valuable lessons we are more likely to repeat mistakes of the past. We have combined the lessons learned from our team with the goal of making better decisions the next time we experience volatility.
Throughout the crisis, Ralph Allen, the Chairman of our firm, regularly reminded our entire firm and all our clients, this very simple yet profound wisdom, “This too shall pass!” During severe economic conditions, it is very difficult to convince your emotions that this will pass. He would also remind us, that an individual’s “emotional gene” outweighs the “rational gene” and good investors do not let their emotions corral their logic, instead letting the long-term historical trend work for them. Ralph has observed very few people be able to sell a stock or a portfolio and buy back later at a lower price. Invariably, investors wait too long and repurchase at a higher price than the time of the sale.
Kurt Elmhorst, my partner for the past 10 years and a 25-year industry veteran put some historical context on the crisis period. Had an investor purchased the S & P 500 on the eve of the Lehman Brothers bankruptcy (the market had already fallen 22% from the high) the investor would have been underwater THREE years later. However, looking back, patience and courage paid off since the portfolio would be positive 130% total return, or 11% annually (according to CNBC article 9/10/18). There is of course no guarantee that “what goes down will come up”, but this principle of investing low and holding for the long term is a time-tested principle that has usually paid off over historically, and is VERY hard to do in the short-term world we live in today. A second lesson learned from Kurt is the importance of diversification. Through the years we have seen clients with too much exposure to one stock or industry such as the Financial Crisis created significant losses for many of these companies. Lesson learned: proper diversification is critical to long term wealth creation and preservation.
Chris Hammond, our newest team member, and a real student of the markets added the following: Bearish (or negative) analysts invariably sound smarter but in the long run bullish investors usually win the race. Additionally, maintaining adequate amounts of safe (or liquid) dollars allows investors to maintain a long-term view when the short term is in doubt. It is human nature to want to “do something” when the situation is bad, however, often doing nothing is a better tactic.
Ginny Houghton, my partner and an experienced advisor, notes the following lessons learned. Create an Investment Policy Statement and a comprehensive financial plan. During the crisis, both strategies provided a foundation in the mist of volatility and allowed us to turn to the ‘master plan’ which was established when things were not so emotional. The modeling that we were able to do within Envision provided black and white feedback on what, if any, adjustments to their plan were needed and provided a source of comfort…it pays to plan! Her lessons also included taking a close look at upcoming income needs and potential purchases. When a client’s income and cash needs were set aside long-term investors maintained the confidence to ‘ride out’ the cycle from what I saw compared to those that sold monthly during declines. And finally, don’t be alarmed to make adjustments in the portfolio due to the environment, but those that made drastic changes – selling all equities or even cutting exposure in half – hurt themselves much more than those that made minor shifts in allocation.
Finally, my lessons learned from my journal and the exact dates of the journal entry:
10/9/08—–Quote from Sir John Templeton, “Buy stocks at maximum pessimism.” On this date, some commentators were discussing a second Great Depression was possible or may already be happening. This was the date I felt “maximum pessimism”. By October 10, 2008, the week had proven to be the largest withdrawals in a week’s period in history. October 10, 2008 would have been one of the best days to invest in my lifetime.
9/21/10—-On this date I wrote, “I am sensing a beginning of the end to this period. For the first time in nearly 2 ½ years, I am beginning to feel more comfortable.” The lesson learned would be easy to miss, but It was about 2 ½ years since the auction rate preferred crisis hit our firm and about 1 ½ years since the market bottomed. As Ralph has described to me many times, “They don’t ring a bell at the top or the bottom of the market.” It was 18 months after the bottom before I would admit perhaps the bottom had occurred.
We realize none of our “lessons learned” are earth shattering or even necessarily new, but it is worth stating and remembering them in order that we don’t repeat past mistakes. In the end, how we act and react to economic conditions is a bigger risk than even the markets themselves. Thank you for your trust and relationship.
See Parts 1-5 on our website at: https://aahe.wpengine.com/september-2008-the-month-i-will-never-forget/
**Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures a profit or protects against loss. Investing involves risk including loss of principal.**