My personal “GFC” story – 10 lessons hopefully learned
Personal experience 2007-2009
There are a lot of articles currently about the “Great Financial Crisis” which culminated exactly 10 years ago when Lehman Brothers collapsed on September 15th 2008. There is still a lot of discussion around who is to blame for this, however most of this is nonsense as Barry Ritholz nicely summarized here.
My personal story is relatively short but quite lucky: Due to my “day job” back then, I saw many early warning signs in 2007. Although I had no idea how deep the crisis would be, I got mostly out of the stock market by the end of the year 2007.
This was maybe my only successful timing action I ever managed to do with some success. I even made some decent money with shorting that I had just discovered back then and a was on track to positive performance in 2008 when I was caught in the mother of all short squeezes, the famous “Porsche Volkswagen corner” which cost me more than -10% portfolio performance.
Nevertheless especially the years following the crisis taught me some important lessons which I wanted to share:
My 10 lessons (hopefully) learned
- Financial Crisis / crashes often look similar but are in effect unique
The GFC was my 3rd “Crash” or big crisis that I experienced (1987, Dotcom, GFC). Each of them had different reasons (1987 portfolio insurance, 2001-2003 general overvaluation, 2007-2009 real estate combined with derivatives). Therefore it is not very helpful to concentrate on what happened in the last crisis and expecting that the next one will happen the very same way. I don’t know when the next crisis will happen and what will ultimately trigger it, but it will be something different - Early warning signs are usually ignored because “the economy is doing fine”
People are often only believing what they see. If they see construction cranes everywhere, many people ignore what the doomsayers are trying to tell them. Often this works as there are always problems, but sometimes it doesn’t. That’s why in my opinion especially real estate “bubbles” go on for so long. I had been fro instance in Ireland in 2007 and no one back then could imagine that the boom could stop which it did pretty soon therafter - It often takes longer for the full crisis scenario to play out than expected
Just look at the movie “The Big Short”: It is extremely difficult to time these events. I was personally very lucky in 2007. But what usually happens is that many people get out too early, see the others making more and more money and then get in just before the crash happens. This is for instance what I saw especially in the Dotcom crash. There was the Y2K scare where many people sold end of 1999 only to see prices go up some 50% to 100% in the next few months and then joined back in just before the carnage began. - If things then go wrong, they go wrong pretty quickly
Another potentially fatal mistake is to believe that if the crisis hits, one is able to get out in time just by looking at the news all the time. This is in my opinion only wishful thinking. When things go south, then at first it looks like a buying opportunity (“buy the dip”) but then, if the s… really hits the fan, many investors are not able to realize the losses and always hope for the next rebound to sell at a better price. This happens until they give up and then sell usually at or near the absolute low point. The whole process often plays out in a couple of days /weeks in retrospect. - Anything can happen to single securities in times of panic
This is what I learned the hard way with the Volkswagen short: Anything can happen to any security in any direction, especially if the trade is crowded. So use puts instead of outright shorts for instance. - The deeper the crisis goes the more pessimistic people will be
When things really went south in 2008/2009, a lot of people predicted the next “great Depression” similar to 1929. What they didn’t take into account was that for instance some powerful institutions could do something against a full meltdown. Maybe this was not always “fair” on a case by case basis but the total meltdown in the real economy didn’t happen.For investors, this is difficult because everyone will say that “This time is different”- In 2008/2009 social media just started, it will be interesting how this will play out next time. Deep pessimism about stocks will stay for a couple of years which is often the best time to invest. - Like in an earthquake, there will be many “aftershocks” for which one should prepare
When a big earthquake happens, the main damage actually comes from the aftershocks. The aftershocks will often do larger damage than the initial quake as the structures are then already compromised and will collapse easily. After the GFC, the most damaging aftershock was clearly the “Euro crisis”. - Opportunities will present themselves for some time to come so no need to hurry
After the GFC, there were great investment opportunities for several years. Especially the aftershocks (Euro crisis see above) created some great opportunities which carried me through the first years of the blog. So no need to hurry. - It is psychologically difficult to buy in a panic, however it is even more difficult to hold on when prices have gone up and aftershocks appear
This was maybe my greatest mistake following the financial crisis: In 2008/2009 I bought a couple of “high quality compounders” like Fuchs and Rational. After these stocks gained 30-50%, I sold them because there were “cheaper” stocks available. This was a BIG mistake as these other stocks often were lower quality. In the long run this cost me a lot of performance as the quality names would have performed much better. This is for me personally the most important lesson of all that holding is often much - It makes sense to think about your “Investment infrastructure” from time to time
One of my lessons was that it makes sense to “ring fence” short positions, otherwise my losses with Volkswagen would have been much bigger. Alos making sure that your broker is still around after a real stress scenario makes a lot of sense. I have distributed my portfolio over a few brokers plus another back up account just in case….
value and opportunity 
I’ve just inherited 7 figures in Euro. Cash is costing me negative interest. What shall/can I do?
Congrats!! But Sorry, this blog is not the right place for such a question.
Why not! I respect your views on investment-related matters.
Thank you but I am not an investment advisor……
I am catching up on this blog, and started by reading your watch series.
A shame you missed out on the Swatch recovery – your thesis was right, why did you not jump in?
Good lessons. Thanks for sharing!
HUMOROUS T-Shirts are an Amereican tradition.
Once the next down cycle hits, what’s your view on catching a falling knife (i.e. buying in small chinks on the way down) vs sitting on the side and waiting for a bottom and a clear reversal before jumping on a particular security?
First of all that depends on the character of every single investor. Secondly, I think you will never get a “clear reversal” signal. It only looks like that in hindsight.
The best startegy is to own stocks long term and hold them through, I would not advise to actively time a potential crisis as I have lined out in the post.
Of course, with your good call on the last bear market, we cannot resist asking you if you are seeing similar excesses today? Or asked differently: How long do we have in this cycle?
As I mentioned in the post, this was a one time lucky event. I have absolutely no opinion about “this cycle”.
9 has happened to me too; 3 is happening to me now (too much cash allocation, too early); never really thought about 10, although I have multiple brokers.
Thanks for this list.
Best
Tom
For someone like me who is at the beginning of his investment career and never experienced a crisis, this article was very helpful and insightful. Thank you
Is there any chance that I can search on your website for comments, that I have made years ago? I remember vaguely, that I made a comment about the Turkish economy and the Turkish stock market years ago (classical doomsayer stuff) which I would like to reread, if possible. Now, that we are here in Turkey in the middle (or from my point of view, at the beginning) of our own crisis, I would like to compare my thoughts made then with the reality we are experiencing today.
#10 is a very good point; over here there are two popular investment accounts available at all brokers;
1. All investments are owned by the investor and the broker can’t touch them. Subject to withholing tax on foreign investments
2. All investments are owned by the broker and labeled as an insurance, but for all other intents and purposes works as a brokerage account for the investor. Subject to third party risk, no withholding tax on foreign investments.
The second one is obviously quite popular for foreign stocks, but I haven’t been able to convince myself that the 15% withholding tax on dividends is worth it considering adding additional risk.
After much experience, I know only deal with Interactive Brokers (6bn tier 1 capital). My account is not seggregated but I have signed up for the $2.5m US gov gtee.
They are not always great: very weak non-T-Bills fixed income offering, no access to the LSE RSP order book (most of the trading) and no access to the large order book trading on all european exchanges (only in the US). So challenging to get filled at attractive prices sometime – but true DMA, low spreads, low fees, great FX.
(I don’t work there and am not a shareholder unfortunatly 🙂 )
Great article,
although, check your dates, I think you wrote “2017” a couple times and you really meant “2007”
Being from Ireland, #2 is definitely correct. Every man and his dog had levered bets on the Irish property market, obvious to any risks.
James
streetsofvalue.com
*oblivious to any risks.
In the US people thought there was little problem making risky loans because house prices always went up (even the Fed’s Bernanke thought so). If a borrower defaulted the creditor could always foreclose and sell it to someone else at a higher price.
A lot of people go crazy in a good bubble. In the 1990’s polls showed that most ‘investors’ believed that stocks would go up 20 % a year for a long time.
A current example would be Tesla stock.