The Wall Street Journal
AUGUST 30, 2000
By GREGORY ZUCKERMAN
The numbers hardly tell the story.
Today, the Dow Jones Industrial Average stands roughly 2000 points below where it was on this end-of-summer weekend one year ago. No one knew then, of course, but the U.S. stock market and the world economy were just days from historic calamity, unprecedented in the lives of anyone born in the last 80 years.
And today? We are nearly six months into one of the most impressive bull markets in memory; the Dow has risen 46% since early March. The Nasdaq Composite Index is up 60%.
Go figure. It’s been a year of horrors and opportunities for investors.
The troubles began in 2007 with rising defaults among “subprime” mortgage borrowers and a market slowly drifting downward from an all-time high set that October.
But then critical mass was reached over a stunning two-week period last September. The U.S. government rapidly took over mortgage-lending giants Fannie Mae and Freddie Mac, along with huge insurer American International Group.
Onetime Wall Street power Lehman Brothers filed for bankruptcy, wounded brokerage giant Merrill Lynch rushed into the arms of Bank of America, and federal regulators seized Washington Mutual in the largest bank failure in U.S. history.
At one point, panicked investors offered to buy U.S. Treasury bills without asking for any return on their investment, hoping to simply find somewhere safe to put their money.
By early 2009, when the stock market hit what looks like its post-crisis bottom, the collapse had vaporized more than $30 trillion, a decade’s worth of investment gains.
Yet, almost as stunning as the fall, has been the stock market’s recovery. Although still well below 2007 levels, the market has defied horrible levels of unemployment, a housing market that is still barely breathing and an economy bound in recession.
There are ample signs that the worst is over, of course, and a recovery may already be under way. (Yes, but tell that to the millions who have lost jobs, business owners who have shut down their companies or the legions whose retirement nest eggs may not recover in time. Their personal recessions may never be over.)
So what have investors learned from all this? With a full year of hindsight, here are some lessons of the crisis:
Diversification doesn’t always work. Financial advisers have drilled into investors the need for diversification. But the past year has taught that spreading money around the globe and into different asset classes sometimes results in less safety than one would expect. The lesson isn’t to put more eggs in a single basket, but to acknowledge the limits of diversification.
Markets are more interlocked than ever before. When the U.S. markets began to fall, investors pulled money from foreign stocks, almost every kind of bond and even investments that sometimes are sold as a way to protect a portfolio, such as commodities and hedge funds. Even gold, a traditional haven, experienced some rough periods as investors raised cash by selling almost anything they could get rid of.
Understand every investment. Even the most sophisticated investors can be fooled by complicated investments.
In October of last year, Chuck Prince, Citigroup’s CEO, said “we expect to return to a more normal earnings environment as the year progresses,” while UBS CEO Marcel Rohner said “we expect positive investment bank performance.” But Citigroup and UBS turned into two of the biggest losers from the crisis, as the seemingly safe collateralized debt obligations on their books led to billions of dollars in losses.
Just as banks need to make sure they understand the risks and downsides of their holdings, so do individual investors.
Make sure your portfolio is as liquid as you need it to be. Some of the biggest mistakes were made by investors who thought their holdings were more “liquid,” or easy to exit without incurring big cost, than they actually were.
Even university endowments run by some of the most sophisticated investors were surprised to find that their hedge funds, private equity and other holdings were difficult to exit in the heat of the crisis. They’ve vowed to do a better job of matching their needs and their investments.
Government works. The aggressive steps by the government seem to have helped avert an even deeper recession, or even a depression, suggesting that big government can sometimes be a friend of business.
And today? We are nearly six months into one of the most impressive bull markets in memory; the Dow has risen 46% since early March. The Nasdaq Composite Index is up 60%.
Go figure. It’s been a year of horrors and opportunities for investors.
The troubles began in 2007 with rising defaults among “subprime” mortgage borrowers and a market slowly drifting downward from an all-time high set that October.
But then critical mass was reached over a stunning two-week period last September. The U.S. government rapidly took over mortgage-lending giants Fannie Mae and Freddie Mac, along with huge insurer American International Group.
Onetime Wall Street power Lehman Brothers filed for bankruptcy, wounded brokerage giant Merrill Lynch rushed into the arms of Bank of America, and federal regulators seized Washington Mutual in the largest bank failure in U.S. history.
At one point, panicked investors offered to buy U.S. Treasury bills without asking for any return on their investment, hoping to simply find somewhere safe to put their money.
By early 2009, when the stock market hit what looks like its post-crisis bottom, the collapse had vaporized more than $30 trillion, a decade’s worth of investment gains.
Yet, almost as stunning as the fall, has been the stock market’s recovery. Although still well below 2007 levels, the market has defied horrible levels of unemployment, a housing market that is still barely breathing and an economy bound in recession.
There are ample signs that the worst is over, of course, and a recovery may already be under way. (Yes, but tell that to the millions who have lost jobs, business owners who have shut down their companies or the legions whose retirement nest eggs may not recover in time. Their personal recessions may never be over.)
So what have investors learned from all this? With a full year of hindsight, here are some lessons of the crisis:
Diversification doesn’t always work. Financial advisers have drilled into investors the need for diversification. But the past year has taught that spreading money around the globe and into different asset classes sometimes results in less safety than one would expect. The lesson isn’t to put more eggs in a single basket, but to acknowledge the limits of diversification.
Markets are more interlocked than ever before. When the U.S. markets began to fall, investors pulled money from foreign stocks, almost every kind of bond and even investments that sometimes are sold as a way to protect a portfolio, such as commodities and hedge funds. Even gold, a traditional haven, experienced some rough periods as investors raised cash by selling almost anything they could get rid of.
Understand every investment. Even the most sophisticated investors can be fooled by complicated investments.
In October of last year, Chuck Prince, Citigroup’s CEO, said “we expect to return to a more normal earnings environment as the year progresses,” while UBS CEO Marcel Rohner said “we expect positive investment bank performance.” But Citigroup and UBS turned into two of the biggest losers from the crisis, as the seemingly safe collateralized debt obligations on their books led to billions of dollars in losses.
Just as banks need to make sure they understand the risks and downsides of their holdings, so do individual investors.
Make sure your portfolio is as liquid as you need it to be. Some of the biggest mistakes were made by investors who thought their holdings were more “liquid,” or easy to exit without incurring big cost, than they actually were.
Even university endowments run by some of the most sophisticated investors were surprised to find that their hedge funds, private equity and other holdings were difficult to exit in the heat of the crisis. They’ve vowed to do a better job of matching their needs and their investments.
Government works. The aggressive steps by the government seem to have helped avert an even deeper recession, or even a depression, suggesting that big government can sometimes be a friend of business.
But questions remain about whether all the spending will eventually lead to inflation or other problems, making this a qualified lesson of the period.
Don’t let financial companies become too big to fail. It’s not clear if regulators fully understand this lesson of the fiasco. For years, critics said companies like Fannie Mae and Freddie Mac had grown too large, and that firms like Lehman Brothers carried too much debt. Today, firms like Goldman Sachs and J.P. Morgan Chase are growing and might end up too big to be allowed to crumble, some analysts say.
Factor into any investment equation a worst-case scenario. Too many investors piled into housing-related investments, confident that real estate never had dropped on a national basis or that investment-grade mortgage investments never defaulted. They would have been better served to examine potential holes in their bullish stance.
Don’t get too gloomy. Like the old saying goes, in every crisis is an opportunity. As nations around the globe confronted the crisis and pumped huge sums into their economies, the economy stabilized. And even as the recession looked its worst, the stock market began to sense that a recovery was coming.
