What the lesson of Lehman Brothers means for investors nine years later By: Mark Hulbert | September 8, 2017
Stock market investors have been conditioned to expect big returns year in and year out
CHAPEL HILL, N.C. (MarketWatch) — Could the U.S. stock market fall by 25% in four weeks’ time.
It might seem unlikely, but it could.
And that’s crucially important to remind ourselves of, even though most of you will dismiss it as trivially obvious and pointless.
Just consider what happened nine years ago this month: the bankruptcy of Lehman Brothers, declared on Sept. 15, 2008. It had been the fourth-largest investment bank in the U.S.; its bankruptcy was the biggest in U.S. history.
It’s hard to exaggerate how momentous that event was. In its wake, several money market funds began “breaking the buck,” meaning that they were unable to maintain their net asset value and began selling for less than $1 per share. That had never happened before, and almost everyone had assumed it never would. Liquidity across the economy dried up literally overnight, and many industries and sectors of the economy came to a standstill.
The stock market plunged, not surprisingly. The Dow Jones Industrial Average DJIA, +0.16% shed 25% over the next 30 days — one-quarter of its value in only four weeks, in other words. If a similar calamity were to hit the market today, the Dow would be trading just above 16,000 at the end of the first week of October.
I think most would agree that Lehman Brothers’ bankruptcy was the most momentous single financial event in U.S. history in decades.
And, yet, hardly anyone saw it coming. That perhaps is the most important lesson we should be drawing as we “celebrate” the ninth anniversary of that event.
Consider my performance-tracking of dozens of stock market timers. On average, the market timers with the best track records going into September 2008 had far higher equity exposure levels on Sept. 15 than those with the worst records. This does not inspire confidence that market timers will be able to get us out of equities before the next Lehman-like catastrophe.
‘Risk happens fast’
A related investment lesson of Lehman’s bankruptcy is that “risk happens fast” (to quote the famous words of Doug Kass, president of Seabreeze Partners). If the Dow can lose a quarter of its value in a month’s time, you are vulnerable to suffering huge losses before you are able to assess what’s happening and make any appropriate changes.
While big and quick losses are possible at any time, we tend to forget that if the stock market records gains year after year. We are especially prone to such forgetfulness this month, since those of us focusing on any anniversary will be looking back 16 years — to the Sept. 11, 2001, terrorist attacks.
If losing 25% in a month’s time would be intolerable, then you should cut back your equity exposure now so that you’re not tempted after disaster strikes to sell into the panic that immediately ensues.
If we can finally learn that investment lesson, perhaps that disastrous event nine years ago won’t entirely have been in vain.
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