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Reminiscences of a Financial Crisis

Reminiscences of a Financial Crisis

| March 16, 2023

The last few weeks have a lot of people talking about 2008 and the financial crisis.  It has brought up many memories as I was fortunate enough to be a young manager at the time.  I say fortunate because as tough as it was to go through that period only being 4 years in the business, the lessons learned were invaluable. 

I want to start off by saying that comparing today to back then and extrapolating similar outcomes is most likely to be wrong.  If there is one thing I have learned over the last 20 years managing money it is that the obvious outcome is almost always wrong.  It is the job of a money manager to try and figure out the best way to invest money in the event a number of different scenarios plays out. 

One of the mistakes that I made back in 2008 was to try and figure out what each new headline and government intervention was going to mean for the economy and stocks in general.  When Bear Stearns went under and JP Morgan purchased them for $2 a share, we all thought the worst was over.  When Lehman happened and contagion spread, we all thought this would never end.  The reality lies someplace in between and I have learned to take “expert” opinion with a grain of salt and to let the markets be my guide in what to expect. 

Another observation from that time period was that we would get these large drawdowns in risk and every time the government made an announcement, or the FED cut rates, or there were rumors of some deal, markets would rally and we would interpret that move as “THE FIX” and get excited that the bottom was in.  It was impossible to figure out which action actually led to the bottom but hopes were dashed pretty frequently as each intervention rally eventually led to lower prices. 

One of the most important things I learned from 2008 as well was that psychology matters.  Everyone has heard the saying you want to buy when there is blood in the street.  This is absolutely true, but it is very difficult to know when there actually is blood in the street.  The reason this is so important is because psychology effects positioning.  Positioning matters a lot for both short and long-term movement in stocks.  The positioning reflects psychology no matter what someone says (think actions speak louder than words).  In fact, as I look back to 2008 and would watch these gigantic bear market rallies it dawned on me that this had little to do with “THE FIX” and more to do with negative positioning being unwound. 

On top of this positioning, the psychology of my clients was also unbelievable to follow.  Throughout the beginning of 2008 they were very comfortable buying every dip.  As markets suffered but did not crash they became impatient but were comfortable sticking with it as “long-term investors”.  As Lehman happened they began to get really scared and would call up panicking each large down day, and call up asking “is this the bottom” on each huge rally day.  Eventually in early 2009, the gyrations and lower values wore on them so much that I spent a few months reallocating worried clients into CD’s across multiple banks in order to stay under the FDIC insurance.   DING! That is what blood in the streets looks like and that is what a generational buying opportunity is. 

As we fast forward to today, I can not tell you which is going to be the next bank that goes under.  I also can not tell you what the government is going to do to intervene and prop markets up.  I also can not tell you what the Federal Reserve is going to do with interest rate policy (although markets are saying they raise 25bps next week and they are done and will be forced to cut by the summertime).  What I can do is look at where we are in the business and credit cycle and have a reasonable idea of what is fairly priced, underpriced, and overpriced based on history.  I can also tell you what the psychology is of most market participants (Hint:  It is much closer to 2021 than it is 2008).  At the same time I can tell you that positioning is very mixed between different market participants and that is going to have a big effect on how this plays out and in my view it is going to be a lot different than people expect.  For instance, I think those that expect a repeat of 2008 are going to be disappointed as well as those that think we are going to have a repeat of 2021.  In any event, it is important to be objective and flexible as the data changes and to pay attention to the things that really matter and not the headlines or experts telling you what each intervention means for stocks and the economy.  Eventually, there will be enough blood in the street to get a great buying opportunity for risk assets.  Right now I think we are still in the “it’s ok I’m a long term investor” phase and positioning is pretty close to this as well.  With the right mindset and discipline this can be a good time to actively manage money.