(Five years ago. It hardly seems possible that 5 years ago the S&P 500 Index hit an intraday low of 666, on March 9th, 2009, the mark of the beast – coincidence, I think NOT. Officially, I have now lived through three equity market crashes of 1987, 2000 and 2008. Each ‘market event’ has taken their own personal toll on my soul in the same way as others in the industry. My goal here is write something personal. I did some things in the last crash – 2008 – that I learned from the other two. Allow me to examine my scar tissue long since healed but visible in its own way.)
They don’t tell you about the pain. Physical pain. When you are nauseous and you can actually feel the cortisol levels spiking in your body – that’s bad by the way.
Blood pressure? Off the charts!
Welcome to the field of finance. Do professors talk to students about what happens physically when their market positions severely go against them in MBA School? Do they simulate calls where students call their best clients or better still their own mother and father explaining they lost millions of dollars on their best recommendations and they won’t have the retirement they had always dreamed of?
Probably not, is my guess. Even if they did it’s hard, if not impossible, to simulate this feeling in some ‘Ivory Tower’ setting where everything is knowable and risk can be calculated.
(I know personally a handful of brokers who had to make this brutal call to their parents. After I overheard two tearful calls after the 1987 crash, I always shied away and never did handle my parents investment account, as little as it was!)
That’s what wrong with the movie “The Wolf of Wall Street” – which I reluctantly watched while on my last vacation. Jordan Belfort, the protagonist, was shown to be all hype, drugs and sex. Antidotes and crude stories never make this movie very interesting – we in the finance business have our own share of stories as well. But the movie never tells you why he acted this way? My interruption, for what’s it worth, is the physical and mental pain Mr. Belfort felt when losing his blue-collar clients money. Even though in Mr. Belfort’s case, he and his firm lost their clients money on purpose! Only a true psychopath, like Bernie Madoff, could steal people’s money – especially Jewish (like himself) clients’ money – and not feel anything.
Want more proof!
The website ZeroHedge has been keeping a tally on suicides of traders/bankers over the last while including one that occurred early Thursday morning, February 13th, last week, by one Mr. Edmund Reilly. Mr. Reilly (47) – trader/banker jumped in front of the Long Island Rail Road (LIRR) Commuter train at 6 am. ZeroHedge’s tally is up to 10 recent souls!
Why so gloomy? Have you never read anything about the dark side of the financial business? Don’t get me wrong I do love what I do. I have professed my love for equities in this blog “Why do stocks go up and down?” here. Similarly I have also professed my hate for the business “Blowing Up the Financial Business” here.
With any endeavor one pursues whether sport, career or that special someone there is heartache. It comes with the territory. Starting in early 2008 – Martin Luther King Day to be exact, I knew it was highly probable I was about to enter my third ‘market event’. Here are the 10 things I did differently based on the knowledge and experience that I learned from the previous two ‘market dislocations’ to survive this on coming financial tsunami.
1. Anticipate, don’t react to the market or stock price in or of itself. Always ask “What if” questions.
This is where Model Price Theory (MPT) came to my rescue. I was not flying blind. Actually this is an apt metaphor because some days I felt like I was in a cockpit of an airplane using only the instrumentation, blocking out all the financial noise both in the financial press and television. A negative transit was a negative transit, simple and don’t over think it! I could look at the next EBV level down – from EBV+6 to EBV+5 – and get a sense both in terms of dollars and percentages where the next possible support level would be. Also stocks having negative transits of EBV-3, or “Going into the Blue” was an easy sell signal.
Our Index charts (S&P 500 and TSX Composite) were invaluable. We had Index Model Price charts for the above indices going back to 1980. There wasn’t a day that didn’t go by in 2008 and 2009 that I didn’t consult these charts and asked, “What if” questions. I had a SELL strategy for each negative transit. More importantly I had a BUY strategy for each major index support EBV level.
Technical and fundamental analysis, were no use to me when every stock on the board is falling! At least EBV levels gave me a sense of certainty in a very uncertain world.
2. Visualization
Elite Athletes do it, why not investment managers. On the front of our Acker Finley website we place the performance of both public mutual funds we manage – Canadian and US.
Throughout 2008 and 2009, believe it or not, I visualized our future five-year rate of return chart (the future 5 years from the date of the market bottom) on our Acker Finley website, comparing our investment performance versus our selected benchmark after the market bottom, wherever that market bottom eventually would have happened.
Here is our performance chart, screen captured, from our website as of March 10, 2014. This chart shows our performance for the Acker Finley Select US Value 50 Fund (costs and fees included) versus the S&P 500 Index (Total Return in Canadian $) over a five-year period beginning March 9, 2009. I visualized this performance chart over 5 years ago and it came true!
Daily Performance of the Acker Finley Select US Value 50 Fund (CDN$) over 5 years compared to the S&P 500 Index (Total Return in Canadian $)
Visualization the future 5 years, back 5 years ago, helped keep everything in perspective, especially being fully invested if and when the bottom occurred. If we were not fully invested when the market hit its bottom this chart would be totally different (far worse) including (probably) underperforming our benchmark over the last 5 years.
3. You can’t time the market so don’t!
You hear this all the time and its true!
The bottom of the US equity market occurred on March 9, 2009, five years ago. Did we know this at the time? Nope! For this particular crash – 2008 – I was fully invested unlike previous crashes where I tried to time the market resulting in very unsatisfactory long-term rates of return and personal regrets that I didn’t purchase quality companies at generational low prices. Yes, I could have minimized my physical and mental pain short-term by selling equity positions only to have anguish longer-term in not buying great assets at a discount.
(Maybe a partial explanation for the suicides mentioned earlier. This US equity market has gone straight up since September 2011. Who would have thought this would have happened with all the seemingly worldwide bearish economic news especially considering a US Federal government shutdown. An equity investor may have guessed right on the timing of the ‘market crash’ but sitting out the ‘market recovery’ can be equally as painful. Or how about selling and going to cash on March 9, 2009, realizing your losses, staying in cash and watching over a 5-year period US equities recapture previous highs. Painful indeed!)
4. Be prepared both mentally and physically.
Woody Allen said, “Showing up is 80 percent of life. Sometimes it’s easier to hide home in bed. I’ve done both.” So have I. Physiologically it is painful to me to have my net worth and more importantly my clients net worth reduced on a daily basis. In past crashes I did hide underneath the covers, trying to avoid the pain – it didn’t work by the way. For the crash of 2008, I came to work everyday. Yes, I would start fresh and energized every morning only to go home after market hours drained and defeated (and poorer). Knowing this behavioral grind from past market crashes, I increased substantially my physical workout schedule including switching my workout routine from the local gym to an Ashtanga Yoga Studio for a more complete and physical workout. My alcohol consumption, which I would call moderate (red wine only), was reduced to sparingly and infrequent. I faced each working day with bright clear eyes!
5. Communicate with everybody…staff as well as clients.
Like a good marriage communication is key. I took the time to communicate with everyone, from our valuable support staff answering the phones, executive team, to clients who called daily and especially the clients who you don’t hear from. Everyone knows the financial markets are under stress so why add to peoples stress unnecessarily by being uncommunicative. Talking drained my daily energy faster, a precious resource, but it needs to be done.
6. Have empathy with clients who want to bail (sell) but you are running money for the silent majority.
For every client, you have to recognize they have different agendas and pain levels when equities start to head south. The vocal clients get your attention and maybe too much of your focus. Always do what’s best for everybody’s financial interest, to the best of your ability and not the few who you hear. Short-term decision-making may boost your rates of return quickly – going to cash in a down market – and keep the vocal clients happy with the cost being exceptional long-term rates of returns for everyone. Clients have shoes, they do walk from time to time, and it’s usually the vocal ones you tried to appease in the first place that are first in line out the door.
7. Government and Central Bankers will work day and night, pushing and pulling every policy tool imaginable to right a sinking economy but sometimes it just takes time for new policies to work.
I observed in past crashes the Federal Reserve Board (FED) do extraordinary things to right financial markets in past crashes. I have learned the FED has incredible powers with policy options – real and made up – and when the FED wants financial markets to go up, they go up!
Financial markets viewed from 40,000 feet are feedback mechanisms. Good economic policy drives societal financial wealth upward. Poor policy does the opposite. Central bankers are the smartest people on the planet because we trust them with the most valuable piece of machinery on earth. The “money-printing machine”. Print too much money and we as a society have to deal with inflation. Print too little and society would have to deal with deflation. We, as a society, don’t hand this power over to a village idiot. Mr. Ben Bernanke, in my opinion and others, was slow to respond to the unfolding financial crisis of late 2007 and 2008 but once he was on the case every monetary policy device was brought to bare.
Have faith in the “Greenspan, Bernanke, or Yellen Put”. It’s real! Or alternately your house is on fire. You and your community know that the fire department is coming. Whether they save your house is another matter entirely. They are coming, we just don’t know when!
8. Each crash had a different charactistic or theme. Try and pick-up what is going on – some stocks going down faster than others – in the markets as fast as you can. This is the key for capital preservation, if possible, and stock selection on the rebound.
Of the last three ‘market events’, each had a different footprint or reason for plunging equity values not necessarily tied to equities themself. The result however was always the same – equities prices plunging appreciably worldwide.
The ‘Crash of 1987’ was about the value of the US dollar. Both the US dollar and stocks went down significantly but it was the stock market that received all the media attention. Once the US dollar stabilized, at a lower value, the stock market rallied to new highs two years later.
The ‘Crash of 2000’ was a valuation correction in the NASDAQ induced by the Federal Reserve (FED) – remember them – restricting monetary policy, and raising interest rates to 6.5%, to a point of negatively impacting the real economy. Subsequently after the market crash, the FED came to the equity markets rescue and lowered interest and mortgage rates significantly leading to a housing boom and eventually lifting equity markets, at least the S&P 500 and Dow Jones, back to previous 2000 highs.
The ‘Crash of 2008’ was a garden variety ‘financial crises’ – where declining home values triggered substantial declines in an alphabet soup of newly devised fixed income financial products – CDO’s, Asset-backed SIV’s and Sub Prime Mortgage-back securities – bankrupting an over-leveraged regulated banking system including much of the unregulated shadow banking organizations.
For example, in the ‘Crash of 2008’, with the help of Model Price Theory (MPT), we were able to quickly observe that lower valuation and priced stocks faced the greatest risk in a deflationary world. Ever-lower stock prices implied a real possibility of the company going out of business that was a precursor to an even lower future stock price.
This was a wrinkle never observed in the previous two crashes and hurt ‘Value Managers’ rates of return during the two years following the market bottom of March 9th, 2009.
9. I instituted a two-part question when I thought about selling anything in the 2008 ‘Market Crash’. “Why was I selling?” (Answer, probably to feel better) and more importantly “When would I repurchase the position or increase your asset allocation in equities?”
My first two market crashes – 1987 and 2000 – involved what I call one-dimensional selling. Selling for selling sake. It felt good in the moment. At least I was doing something. Protecting capital. Only to see, you guessed it, the stock(s) you sold rally hard (higher) the next day. I felt like a proverbial cork in the middle of the ocean.
This time around, I forced myself to answer two questions before I sold anything. Why was I selling? Whatever my answer, probably very rational – knowing my rationalization – the real answer was I just probably wanted to feel better, physiologically.
Knowing buying during a ‘market crash’ is much harder physiologically than selling, at least for me, I instituted a follow-on question to the “Why was I selling?” question. I would ask myself “So big-shot ‘When do I buy?’” The answer inevitably lead to the stock value or price the company was trading at, on that particular day! So instead of feeling the need to sell, I felt better in that I was buying by not selling a high quality company at a discount to fair market value. Yes, you read this right, buying by NOT selling. Confusing, but it worked!
10. Keep to your personality type. Keep true to yourself. Recognizing that ‘Market Crashes’ changes your daily route and forces you out of your comfort zone.
I have a procedural personality in context of the equity markets – I’m an accountant after all. I like process. Again my first two market crashes took me out of my comfort zone and who I was. Declining markets seem to demand assimilating tick-by-tick news developments as well as rapidly changing stock prices – mostly down. You’re on the edge of your seat trying to assimilate everything because that’s what you think the job entails. With the help of Model Price Theory (MPT) I was able to largely keep to my personality type or mental makeup on track. I say largely because on very active days and weeks the market does twist you into being something you’re not. At least recognizing this is half the battle and a simple mental readjustment can be made to get me back on track.
Once I realized the potential of a market crash (2008) and future equity markets being non-procedural, I looked for ways to enhance my procedural goals away from equity markets. Like how many gym visits did I achieve over a certain period of time that eventually evolved into learning the various Ashtanga Yoga positions that make up what is called the ‘Half Primary Series’ almost four years ago with daily practice.
Conclusion
Will there be another ‘market crash’ in my career, my lifetime? Probably. Will I be ready? As we have seen in past crashes, severe equity market ‘corrections’ can be extraneous events impacting equities as a consequence. Shit happens in this complicated interdependent world. Financial excesses are built up; policy responses are thought out and implemented. Capital excesses are wiped away, setting up the rebuilding phase all over again.
Yes, I made mistakes in the crash of 2008-09. I was not perfect. Can anybody be perfect when presented with a bunch of unknowns and much uncertainty is an open question. But the fact remains, I have three ‘market events’ under my belt and I have learned much not only my physiological makeup but also another fact set of accumulated numbers, data, captured in my database – Model Price App – that will help me – and hopefully you a Model Price App user – ‘keep on top’ of the next market dislocation.
Thanks for listening.
Model Price 