Many people mark the beginning of the Great Financial Crisis (GFC) with the bankrupty filing of Lehman Brothers. There has been a variety of amazing content this week marking the anniversary some of which I’m linking to below and will discuss within the context of my story. My story is not an amazing behind the scenes story like the Tweet storm from Jeremiah Lowin. Nor is it a story about manning the phones to talk investors off the ledge like Douglas Boneparth. I really enjoy these stories, but my story is a personal one from Main Street.
In September of 2008 I was working for a small real estate developer that had a homebuilding sister company. This doesn’t sound good for me already does it? I’d been hired following an internship in 2007. In hindsight the writing was on the wall with slowing lot sales (absorption) and less homes being built month after month. No wonder there were nervous bankers being hosted weekly in the offices. Perhaps luckily the organization had a lot of raw land without entitlements so much of the debt was on acquisition and soft costs rather than the much more expensive sitework preparing shovel ready lots that would’ve set vacant. Home buyers were becoming more scarce at the same time we were rolling-out one of the biggest neighborhoods in our market. Fortunes are made acquiring such assets in recessions.
After leaving Vanguard two years earlier I’d maintained a casual interest in the financial markets and was fairly aware of the news cycle from catching the 6:00 PM edition of NPR’s Marketplace during my commute. While in the industry I was a daily reader of the WSJ, but hadn’t picked up the paper in a while. On Friday September 12, 2008 I grabbed a copy of The Journal shown below in an airport before my wife and I’s journey to Austin, TX. Our plan was to check out the city, see a UT football game, and just have a good time. I read the paper and was enthralled from the insider perspective. I’m still fascinated from stories during this period.
I read the paper, but while we were in Austin the troubles in Manhattan seemed very distant. UT won the football game and we ate some great BBQ brisket. I came back to work and everything was business as usual. I kept a closer eye on the markets, but it was not my primary focus. Then, a week and a half after Lehman’s bankrupty and my trip to TX on Thursday September 25, 2008 I was called into my boss’ and his boss’ office and was laid-off. It happened to several other people in the office that day. I had only been with the company full time for a year so I was an obvious casualty.
After I came back to my desk to head home in the morning a friend that helped me get the job said, “we better all start polishing-up our resumes.” I just said, “Yeah.” He didn’t know that I had been let go, but all of a sudden the office environment had become different. I think my wife was at home when I arrived back to the house before lunchtime and I recall her asking, “What are you doing home so early.” I cannot believe the details of that day are still so clear. It was also my birthday. I guess they had failed to consult the company birthday calendar in advance of the move to stop the bleeding. More senior people in the company would leave in the months that followed. The organization limped through the next 10 years of work-out sessions, foreclosures, and a variety of legal maneuvering.
I ended-up getting a fill in job in food services before I found a new job in real estate asset management in March of 2009. My wife and I buckled-down on expenses and made it through the turmoil. She had a steady job with a Fortune 100 organization, I received unemployment benefits, and COBRA. We had compiled some savings and were more fortunate than many to not have problems staying in our home or taking on new debt. But, the GFC slammed the brakes temporarily on my career prospects.
Many investors will receive a risk tolerance questionnaire to determine investment suitability. More risk, more reward, but only if you can stomach the volatility. One of the questions following the GFC was, in 2008-2009 stocks lost 50%. What did you do? Did you sell, hold, or buy? This says something about your risk tolerance, but also your circumstances.
This image from the beginning of World War II was created, although used sparingly, to boost the British’s morale during the time of the blitz. If you were able to keep calm and carry on by holding your equity investments, continuing to dollar cost average into your retirement savings or whatever other investment plan you had then you have been rewarded handsomely with returns in excess of 200% on that money since the trough of the recession. Diversify, get your asset allocation right, and try to keep calm and carry on.
I feel fortunate that men like Hank Paulson, Ben Bernake, and Tim Geithner saved the economy from a second Great Depression. While some of the outcomes from the solutions used are socially abhorrent our economy bent, but it did not break. In this article those men discuss “What We Need to Fight the Next Financial Crisis.” The next crisis will not be like the last crisis despite how humans are hardwired to prepare to fight the prior war.
I read an article recently showing France’s Maginot line; a system of tunnels and immobile cannons in preparation of WWII. (Please tell me where this insight came from so I can give proper attribution.) The French expected the new war to be a continuation of the trench warfare from WWI. The Germans pivoted, drove their tanks around the tunnels, and the cannons watched realizing they couldn’t be repositioned as the Germans headed towards Paris. The next crisis will be different. Financial institutions are better capitalized and regulated now. Continue that and allow flexibility to address the next crisis. It will come. Will you be calm and carry on?
Josh Brown, blogging at The Reformed Broker experienced and wrote about this time period and lamented the traumatic experience for investors here. From the image Josh provided via Barron’s we can see that investor’s experience pre and post GFC had a great influence on the likelihood of holding equities. If you were holding equities prior to the GFC you were more likely to continue holding them than had you started investing after the GFC. There are numerous issues concerning poor timing, the economy, student loans, etc. challenging the youngest investors. These are the investors that in general should have the most equity exposure.
Age ranges demonstrate declining equity ownership as one ages except for youngest cohort. GFC impacted almost all cohort’s equity investments.
If history is our guide investors with the longest time horizons will be compensated for taking additional risk. But, how can these investors get the benefit of compounding over extended periods of time if they’re not in the market? They’re not even playing the game to have the chance to stay calm, carry on, and nail the walk off free throw. We need to be able to show investors the power of compounding, but first we have to get past the harm done to everyone on Main Street from the GFC. More wealth has been concentrated in the top 1% while low and middle class citizens have had negative to no real wage growth for decades (H/t Michael Batnick). Investing, even small amounts can help ease this pain. Today the problems of class and race are forefront in society. Areas with high unemployment have the highest opiate abuse. These issues need to be addressed. Meanwhile many potential investors have been a casualty of the least participated bull market on record. Get in the game. Just do it.
Some might say the political pendellum swung too far when Obama was elected President or when Trump was elected President and that each was a counteraction to a prior regime. Some will say Obama inherited Bush’s problem’s and Bush inherited Clinton’s problems. But, blame does us no good. They’re all our problems. I’ll close with an interesting article from Andrew Ross Sorkin about how the GFC crisis led to populism, political polarization, and Trump’s election. Whether you’re conservative or liberal we should all be able to agree that these things matter. Another crisis will come. Will you be prepared and how will you respond?