Nearly wiped out by the GFC

Investors who fail to learn the lessons of the past are doomed to repeat them

March 6 and 7, 2009 were among the toughest days of my life. At the time I was the largest shareholder and research director of the Intelligent Investor sharemarket advice service. On the evening of March 6, my business partner and I sat down to review our options. Things were at crisis point.

We had a weekly wages bill exceeding $20,000 and our revenue had dropped close to zero. Our clients, sharemarket investors, were shell-shocked and so were we. Markets had been savaged by the GFC. The All Ordinaries Index closed the day at 3112, 55% lower than its peak in November 2007.

June was our business’s traditional busy season, when many clients made their annual subscription payments. At least some revenue should flow in then but, in the meantime, we needed to cut every conceivable cost and inject more cash into the company.

We made the gut-wrenching decision to let almost a quarter of our staff go (our editor, a junior analyst, our bookkeeper and a marketing executive). Facing each of them to deliver the news in a tumultuous job market was a low point for my business partner and me.

Our own salaries – already modest by industry standards – were reduced further. Bins would be emptied by us to save on cleaners and monthly office drinks were nixed, among other measures.

Alongside our other shareholders, we reached into our pockets to add the cash needed to keep things afloat for the coming months. At that point, essentially all of my personal wealth was invested in a business that

was burning cash with every passing week. Putting my own financial livelihood on the line was one thing. But I had also put my parents at risk.

I’d been managing their superannuation fund for more than a decade and at the top of the market they had a healthy seven-figure balance. By the bottom it had more than halved – well and truly back into six figures and standing at a level where I was unsure whether it could support their annual retirement expenditure of around $65,000 without meaningfully depleting their balance.

I laid awake many nights mentally punishing myself for this. I’d been aware of the excesses building up in the financial system. I’d warned Intelligent Investor’s readers of these on many occasions. Yet I took my folks’ portfolio into the financial storm with an irresponsible 45% weighting in Macquarie Group shares. They’d been purchased at bargain prices and had risen almost fivefold while paying juicy dividends along the way.

Looking back now, I was gripped by greed. Or at least the fear of missing out on further gains.

As the market slumped, I walked to work each day feeling like one of those cartoon characters who’s run over the edge of the cliff but is suspended in mid-air, legs churning, waiting for the inevitable plunge.

We couldn’t have known it then but March 6, 2009 turned out to be the sharemarket’s low point. Things gradually improved for our clients, our business and my parents’ super fund.

Full marks for wisdom

It’s been 10 years since the peak of the last boom and lately I’ve been reflecting on the whole top-tobottom-and-back experience. Along those lines, a recent interview with billionaire investor Howard Marks has helped spur my thoughts into action. Here are some quotes that hit a nerve for me and what I’ve been doing about it.

“As an investor, you have to deal with two risks: the risk of losing money, and the risk of missing out on opportunities. It’s the job of a good investor to balance the two: you invest, but with caution. You should certainly have less risk exposure today than you would have had five or seven years ago.”

A decade ago I was too focused on the risk of missing out on opportunities. Stocks were soaring and money felt easy to make. Perhaps those “investing” in cryptocurrencies today feel the same way. But having been scarred by the GFC, today I’m far more focused on the risk of losing money. Along those lines, I feel Marks is bang on point when he says: “I think it’s better to turn cautious too soon rather than too late. Most people can’t think of what might cause trouble anytime soon. It’s precisely when people can’t see what it is that could make things turn down that risk is highest.”

There’s plenty to worry about in a country that hasn’t experienced a recession in 27 years. One in which many households have borrowed to the hilt to get into expensive housing markets in several cities. And it’s possible that we’re seeing the first glimpses of a slowdown.

Recent reports from many retailers are that things are tough. And advertising conglomerate WPP has downgraded profit expectations as clients cut back due to “tepid economic conditions for consumer brands”.

All of these are clear and present dangers. But Marks rightly points out that it’s often risks that few people see coming that cause the most pain. So this time I’m taking his advice and that of a wise mentor who counsels, “If you’re going to panic, panic early.”

Lately I’ve been cashing up. I’m aiming to hold at least a 20% cash weighting and have taken profits aggressively on stocks that have done well such as miners (totally selling out of South32 after it almost tripled) and mining services companies (many have returned multiples of the depressed prices at which I purchased them).

I’ve also been ruthless in reversing positions which I feel were mistakes. Earlier this year I purchased some Telstra shares around the $4 mark. In hindsight I was simply following my contrarian instincts to buy when others seemed to be panicking but I hadn’t undertaken a thorough analysis.

That’s no way to make investment decisions and subsequent research has led me to believe that Telstra is not underpriced. So out it has gone from the portfolios with a 10% loss.

One of the portfolios I manage took a 30%-plus loss on Specialty Fashion – a stock I covered in this column back in October – following a severe earnings downgrade on October 18 (another portfolio I manage continues to hold it at the time of writing).

These are the kinds of moves I wish I’d made at the top of the last bull market. Of course I don’t know if we’re at the top of what has been a remarkably smooth and rewarding sharemarket ride this time around. But, like someone living in a bushfire-prone area, it pays to get your house in order before disaster strikes and then hope like hell that your preparations prove unnecessary.

Simply closing your eyes to risk is not a recipe for success. Take it from someone who’s learned the hard way.

Greg Hoffman is an independent financial educator, commentator and investor. He is also non-executive chairman of Forager Funds Management. Disclosure: Private portfolios managed by Greg Hoffman own shares in Specialty Fashion and Macquarie Group (albeit a small fraction of what they held a decade ago).

Like someone living in a bushfire zone, it pays to get your house in order before disaster strikes