Alyce Lomax: Here’s a sad lesson from the financial crisis: After scary times, many people learn little, some learn nothing at all, and way too many instead learned that they love a “good” bubble. We’ve seen too big to fail, too big to jail, and of course post-crisis merger mania left even bigger banks. Five years later, one might think it’s just a matter of time before the next crisis. Remember the “green shoots” years ago? They didn’t make it.
Even today, signs of economic recovery are fragile at best and delusional at worst. Fast zombies are terrifying, and the rampaging zombie bull market has been based on hope more than a real recovery for regular Americans, and floating many weak companies’ stocks higher and higher. We “recovered” from the dot-com bubble with the housing bubble, and despite the scary events five years ago after that massive rupture, now apparently we have the bubble bubble for a soothing sense that good times are back. Be careful out there. When people refuse to learn anything, history repeats itself.
Alex Dumortier, CFA: Perhaps the most prominent lesson I’ve learned from the financial crisis is that just because you can’t imagine something, doesn’t mean it can’t occur.
I remember early on in the crisis — it must have been the end of 2007 or early 2008 — discussing investment banks’ position with a then-Motley Fool colleague. He was convinced it was catastrophic, but I simply could not conceive that an institution like Bear Stearns — which was founded in 1923 and had achieved its fifth consecutive year of record profits in 2006 — could fail. Clearly, the firm’s pedigree and recent track record had blinded me to the obvious truth of excessive leverage and the simple dynamics that underlie a run on the bank, for Bear Stearns would surely have shared Lehman Brothers’ fate if JPMorgan Chase & Co. (NYSE:JPM) had not swooped it up for a mere $10 per share.
My broad takeaway: Particularly in high-uncertainty situations, it’s never a waste of time to question the basic assumptions behind your analysis and to try to flesh out alternative scenarios, particularly the ones you consider to be unlikely or even impossible (they never are).
Jim Mueller: Keep an investing journal. I write down several things in my journal: what I’m thinking, how I’m feeling (for instance, don’t invest while still fuming over that driver who wouldn’t budge), investments I’m considering, and so on. Essentially, it’s a conversation about investing I hold with myself.
One thing I write is the reason I’m buying stock before I do so. This keeps me on a more even keel, because it forces me to think through each investment decision rather than reacting to the moment. I also write down how much I’m investing, once I make up my mind. This helps me track how much I commit to each position.
During that scary time, I was able to thoughtfully invest in several strong companies whose stock prices were down. And the journal showed – when later I thought I had “missed the bottom” –that I really was investing more heavily near the bottom. In fact, I put the most money to work in January and February 2009.
I really was buying when others were fearful (which proved to me that I could), something which has helped tremendously both then and later.
Charly Travers: The crisis highlighted the importance of investing in businesses that do not depend upon the kindness of others. If a company needs access to capital during a time of market stress, it will find that raising money is either very expensive or, in a worst-case scenario, not available at all. Needless to say, the shares of a company in this situation will get battered.
