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We have had almost three years to consume, analyze, cogitate and process the financial events of 2008 and early 2009. If by some chance you have forgotten, never knew or simply chose to block out this period from your memory, let me cite 10 ways this traumatic period affected financial markets, investors and, most important, our valued clients. The memorial pain of the crash of 2008-2009 includes:
* The stock market dropped approximately 50% from May 31, 2008, through March 1, 2009.
* Several financial institutions in the U.S. and Europe failed because of exposure to bad mortgages (subprime) and the securitization of these mortgages via a Wall Street product called credit default swaps (CDS).
* Financial companies named Lehman, Countrywide, Wachovia, Washington Mutual and Bear Stearns, along with many others, disappeared.
* Insurance giant AIG was saved by massive government injections of cash.
* The Reserve Money Market Fund broke a $1 when several companies that issued commercial paper defaulted.
* Iceland faced financial collapse only to be saved by an emergency loan from the International Monetary Fund.
* Beginning the week of October 6, 2008, the stock market closed consecutively lower each of the five trading days on record-breaking trading volume. The Dow Jones Industrial Average lost almost 18% in that week, allowing historians to name it “Black Week.” The Dow, which closed at values in excess of 12,500 in May 2008, closed that week at 8,451.
* By March 2009, the Dow reached a low under 6,500.
* The news media reported daily the number of bank failures and rising unemployment rate.
* For historical reference, the period was named the “Great Recession” in an effort to draw comparisons to the “Great Depression” of the 1930s.
I could expand this list and make us all sick just remembering the financial trauma of this period, but I’ll show mercy and move onto the subject of this article: Was this period a gift or a curse?
My opinion is that this period was a gift because it made us all more reasonable. Here’s why:
* Asset prices reset to more reasonable levels, which allowed investors to make investments that have long-term opportunity and good dividends.
* Companies became more concerned with sustaining their business long-term, so they became more efficient by reducing costs and debt, and they learned to make money selling less.
* Consumers understood the risk of borrowing too much, and that even the price of real estate doesn’t always go up.
* Consumers understood the need to save for a rainy day.
* The word “guarantee” is now met with a wise sense of suspicion.
* The reasonable value of an asset is now viewed more from a cash flow opportunity perspective than its closing price.
When this era ends and historians evaluate it, I am hopeful it will be viewed as a period when we took the necessary financial medicine and realized that we should only buy assets when they are cheap, save money to reduce risk, pay down debt with discipline and spend less than we make.
The basics should be obvious now to those who are living through this period. It makes for a great investment opportunity going forward, because we can now be realistic and not live in a bubble. The Great Recession was a gift to the rational and wise investor, and hopefully it eliminated financial goofiness, at least for awhile. The future looks better because it can now be reviewed with reason and wisdom, not foolish expectations.
