10 years later

It’s 10 years since the financial crisis went into full swing. Lehman Brothers filed for bankruptcy on September 15th 2008 . The US stock market (S&P 500) had already fallen 24%* from the peak (which was in October 2007). It went on to fall a further 43%* over the next six months. The market bottomed out in March 2009.

It was painful. I remember it. I was co-managing a European Equity Fund at the time. My husband and I were on holiday in California the day the news of the bankruptcy broke. I was lucky to be at a firm with a stable client base and we didn’t see large redemptions during the crisis. This meant, unlike most managers who were frantically selling in a rapidly falling market to return cash to panicked investors, we were able to act calmly and continue to invest through the downturn. I learnt a powerful lesson during that time.

We followed Warren Buffett’s advice and were ‘greedy when others were fearful’.

Today I came across the article that Buffett wrote in the NY Times on October 16th 2008 titled ‘Buy America. I am’.

I highly recommend reading it. I quote:

I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.

So, here we are ten years on. Was he right?

Of course he was right. He is Warren Buffett. It pays to listen when he speaks.

If you bought the S&P 500 the day he published his article in the NY Times (which was a month after the Lehman bankruptcy; the market had fallen a further 21%* at that point), you would be up around 280%* through to today.

That’s a compound annual return* of more than 14% (from October 16th 2008 to today).

Cash has returned virtually nothing over that period and inflation has eaten away at your purchasing power at around 2% a year (your real return is negative).

What are the lessons (except listen to Warren Buffett)?

Well, to get this return over the last ten years you had to put money to work during one of the craziest and most volatile times in modern history. Volatility and return go hand in hand - you can’t have one without the other.

10 years.png

The other lesson is that there is always risk, but there is a choice about what to risk and when to risk it.

The risk back in October 2008 was never that you could lose all your money (that can happen in individual companies, but not in a diversified mix of the best companies in the world - the world never actually ends). The risk was that you might have to ride out a temporary loss (aka volatility), because it was totally unclear where the bottom would be (that is never clear). The low ‘risk’ bet back then was cash. But fast forward ten years; cash has steadily and consistently lost you purchasing power.

And so it will always be.

By investing in the stock market you forego short-term certainty for long-term security. Cash does the complete opposite. As I say, risk never disappears but it’s all about what you want to risk and when you want to risk it.

*on a total return basis