Lessons learnt from the 2008 financial crisis are still valid
• When the going gets tough, successful people have a way of ferreting out the opportunities
The good thing about having been around during the 2008 financial crisis is you don’t have to come up with anything new this time. Especially if what you wrote back then was so hellishly clever that it’s well worth repeating. So, not to be opportunistic but because, let’s face it, it’s the right thing to do, here is a rehash of some of the better advice (not that there was ever any not-so-good advice) given back in 2008.
Anxiety causes strange behaviour. Have you noticed, for instance, how everyone’s suddenly going around asking everyone else what’s going to happen to the stock market? As if anyone could possibly know.
The only thing more surprising is the number of people who seem to think they do. They’ll tell you without any doubt that “this is just the beginning”. Or that “the market will go down for another week or two and then recover”. Otherwise “the worst is already over”.
Don’t get confused. It’s important to always keep in mind why you bought a stock. If you’re a momentum investor, once the momentum has stalled it’s time to move on to the next idea. If, on the other hand, you bought a stock based on its fundamentals there’s no need to sell simply because it goes down in a broad market decline. In fact, in that instance if you bought a value stock and it goes lower it should be more attractive.
Here’s one piece of good news: tumbling markets are a great learning opportunity. The more you’re punished for a mistake the less chance there is of repeating it. It might be hard to see why buying a non-performer is such a bad thing when its share price keeps going up; it’s not nearly as difficult to see once it’s dropped 60% or 70%.
Hey, we all make investment mistakes. The trick is not to repeat them. That becomes easier after a bad experience, once the feeling of invincibility has been replaced with a dollop of uncertainty. All of this is assuming that you don’t allow yourself to get taken out the game.
Too many investors don’t bother to question the underlying premise of diversification. They don’t know how it minimises risk or at what point the benefit from adding an additional position becomes immaterial. But as someone once explained: “If I were forced to spend my life betting on horse races, I’m certain I would bet on very few races. Whenever I did bet on a race, I’d bet on several different horses. Why? Because I know more about people than I do about horses. The likelihood that a few horses in a few races get too much favourable attention seems much greater than the likelihood that I could ever make reasonably specific judgments as to which horse is most likely to win a given race. Of course, I would do best if I didn’t bet on any horse races at all.”
Let’s make it really simple. All you need to do is answer two questions: what can go right?; and what can go wrong? That’s it. If the market is already accounting for everything that is known, it’s what’s unknown that will dictate the future of upticks and downticks.
What can go wrong? Anyone who fails to approach the market without first assessing the worst-case scenario is bound to end up in trouble. No-one likes to think about the pitfalls. All investments are optimistic, but behind every steep loss is an investor who was blindsided.
What can go right? It’s those investors who can map out successful scenarios who can justify paying up and who turn connect-the-dots artwork into multibagger masterpieces.
So, what can go right? What can go wrong? Figure out those two answers and go from there.
Rebase to zero. Ignore charts of historical share price performance. How a company was valued at its peak is no guide to its value today. Those shares that have fallen furthest may yet have further to fall. Start with a blank sheet of paper no prejudices or preconceptions — and build an investment argument that reflects today’s reality as you perceive it.
Whereas when things go sour, most of us turn to sulking, worrying and panicking. When the going gets tough, successful people do something different. They look for the opportunities. That is what sets them apart.
Take Benjamin Graham, who went bankrupt three times as an investor. Each time he documented and studied his failures and was eventually able to impart this acquired investment wisdom to countless others.
What’s the right thing to do: this or that? Which is safer: this one or that one? Your answers hinge on the basis used for making comparisons. What are the salient features; what’s noise? Are you looking at a large, objective collection of evidence or just the latest data? Are you focusing on the ways competing alternatives are similar or the ways in which they differ? What’s your time-frame?
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WE ALL MAKE INVESTMENT MISTAKES. THE TRICK IS NOT TO REPEAT THEM
SO, WHAT CAN GO RIGHT? WHAT CAN GO WRONG? FIGURE OUT THOSE TWO ANSWERS AND GO FROM THERE