Fortunately, it is easy for Fools to avoid getting caught up in one of these vicious downward spirals. Only own shares of companies that employ conservative levels of debt financing. You don’t want to be in a position where a company cannot refinance a large near-term maturity or is at risk of breaching debt covenants with the slightest downturn in its financials. Instead, look to own companies with cash-rich balance sheets and strong consistent free cash flow generation. You’ll sleep better at night knowing you don’t have ticking time bombs in your portfolio.
Matt DiLallo: I lost so much money during the financial crisis that I couldn’t take it anymore. It was late February of 2009 and after dutifully saving and investing for years, it was time to take a break. It was time to turn off the TV, put down the paper, and just walk away. So for the months of March and April I didn’t buy one share, nor did I contribute one dollar to my investment accounts.
While I admit the break from the noise was nice, I also missed the beginning of the greatest stock market recovery in my lifetime. Thankfully, I hadn’t fallen into the temptation to sell everything so I was rather fully invested and was able to catch most of it. In fact, my current net worth is now four times higher than it was before the beginning of the financial crisis, but the lesson I learned is real clear: Timing the stock market is a fool’s errand.
While I lamented that every stock I’d ever bought had lost money, it really didn’t matter because it would be decades before I’d ever need any of it. That’s why I now continue to press on and invest, no matter if the market is up or down. Because there is wisdom in the saying…It’s not timing the market, but time in the market that leads to investing success.
Chuck Saletta: The most important lesson I learned is the power of a solid balance sheet to protect a company’s survivability when its plans falter. Prior to the crisis, I barely paid any attention to the balance sheet. Then, General Electric Company (NYSE:GE) nearly fell apart during the crisis due to the heavy leverage on its balance sheet in spite of holding a coveted AAA debt rating at the time.
There was nothing quite like watching one of the largest and seemingly strongest companies around nearly choke on excessive debt to drive home just how important balance sheets are. After watching that mess unfold, I started incorporating tighter balance sheet checks in my buy and sell decision criteria, and thus far, that change has served me well.
Isaac Pino: Never invest in an industry where the incentives are broken. For now, I think Wall Street remains beyond repair.
The recent financial crisis followed a familiar storyline: A run-up in real estate prices led to widespread speculation, and suddenly, unexpectedly, the floor fell out from under us. While it’s true that Americans from all walks of life contributed to the hysteria, it was the casino-like operations of the big banks that derailed the economy.
