From my perspective, not much has changed on Wall Street to-date. Sure, the banks have reduced debt levels, or “deleveraged.” We all have. But it’s not clear that regulators — let alone investors or the American public — really understand the complex machinery that still runs Wall Street.
As we pointed out earlier this year, a recent survey found that “more than half of institutional investors did not trust how banks measure the riskiness of their assets.” And JPMorgan Chase & Co. (NYSE:JPM), hailed by many as one of the best-managed banks during the crisis, is currently facing a $6 billion lawsuit from regulators over bad mortgage loans.
What occurred in 2008 was a perfect storm that wreaked havoc on both Main Street and Wall Street. I believe Main Street has learned a difficult lesson over the past five years and cleaned up its balance sheet. I can’t say the same for Wall Street.
Patrick Morris: Five years ago I was learning firsthand in my college classes of the financial industry that was seemingly collapsing all around me. We learned stocks were supposedly priced to be the present value of their future cash flows; the market was efficient and no one could beat it; and if interest rates go up, bond prices go down. Yet while we learned from the textbooks, we also learned firsthand while doing case studies on mortgage-backed securities, and trying to wrap our heads around collateralized debt obligations.
Yet one indelible lesson I learned was that for an investor who is investing over a 30-to-40-year horizon, the market has historically returned an average of a little over 7% each year. By simply investing $25 a month in the S&P 500 from Sept. 2, 2008, until today you would have received a little over 8% annually. Even in the midst of wild market fluctuations in a period entitled “The Great Recession,” the historical trend held true, and returns were available to those who simply trusted in the market and didn’t attempt to time it.
Frank Thomas: You’re never as contrarian as you think. We all like to pretend that we have the iron stomach of Warren Buffett and that we’d recognize it when it starts raining gold, but when the crap really hits the fan, we’ll freeze just like anyone else. Had more banks failed and American International Group Inc (NYSE:AIG) crumbled, we would have entered a depression and those seemingly brave investments would have turned to dust.
In fact, the only way to take advantage of a panic is to prepare ahead of time. Build a shopping list during the good times so you’re not relying on emotional analysis. Keep an opportunity fund, so you’re not selling losers to buy more potential losers. And, keep enough cash to cover living expenses, so when the opportunity comes, you’re not choosing between losing your portfolio and losing your next meal.
John Divine: I was in college studying finance in the fall of 2008 when I noticed something odd. Suddenly everyone cared about the stock market.
The enormity of the crisis hit me in philosophy class. Instead of launching into a rant on the mind-body problem, my professor gave uncharacteristic pause, before saying this:
“The Dow fell 700 points today. Welcome to The Great Depression 2.0.”
