By Philip van Doorn, MarketWatch
As we approach the 10-year anniversary of the post-crisis stock-market bottom on March 9, 2009, three money managers have shared the stories of how they and their clients navigated a dangerous financial environment and the lessons all investors can learn from history.
Ten years can soothe memories. For some younger investors, the mortgage-credit crisis, stock-market bloodbath and eventual rebound might seem irrelevant, or even ancient history. The circumstances around the next major stock-market decline will be different, of course, but human psychology will no doubt be similar to what drove many investors in 2008 and early 2009 to act against their own long-term interests.
‘The longer you wait for things to seem safe, the closer you are to the day before Thanksgiving, if you’re a turkey.’
Charles Lemonides, chief investment officer of ValueWorks in New York
All three managers emphasized the importance of maintaining discipline through a crisis and, rather than running away from the market, staying in and even taking advantage of price declines to improve your portfolio to take better advantage of the inevitable recovery.
Let’s start with four charts. Here’s how the S&P 500 Index and Dow Jones Industrial Average performed as the subprime-mortgage bubble burst, from the end of 2007 through the bottom on March 9, 2009:
Those are total return figures, which include reinvested dividends. You can see the worst of the decline began in September 2008, which is when Lehman Brothers went bankrupt, Washington Mutual failed (with the wreckage purchased from the FDIC by J.P. Morgan Chase /zigman2/quotes/205971034/composite JPM -3.71% ) and Merrill Lynch was acquired by Bank of America /zigman2/quotes/200894270/composite BAC -3.68% . Then President George W. Bush signed the Troubled Asset Relief Program, or TARP (otherwise known as the bank bailout), on Oct. 3, 2008.
Here are the indexes’ total returns from the end of 2007 through the end of 2011:
You can see that in early May 2011, the indexes were close to returning to the break-even point, before pulling back.
Here are total returns from the end of 2007 through March 6, 2019:
One can argue that the above chart provides a more realistic picture of the market than the following chart, from the bottom on March 9, 2009, through March 6, 2019:
That last chart shows a return of over 400% for the S&P 500 from the bottom through March 6. But you can see in the third chart how important it is to take a long-term return from a generational market bottom with a grain of salt. Since we’re 10 years out from the bottom, you will be impressed with the 10-year return figures for most stock mutual funds.
Capitalizing on a bad situation
Charles Lemonides is the chief investment officer of ValueWorks, which is based in New York and has about $200 million in assets under management. He said the financial crisis was “so dramatic it caught everyone’s attention.”
“People who had a significant net worth had a significantly different net worth in a moment in time,” he said.
Even the most reasonable person can panic during a sustained stock-market decline.
Thyra Zerhusen is the chief executive officer and chief investment officer for Fairpointe Capital, which is based in Chicago and has about $3 billion in assets under management, including the AMG Managers Fairpointe Mid-Cap Fund /zigman2/quotes/206048144/realtime ABMIX -1.28% and the AMG Managers Fairpointe ESG Equity Fund /zigman2/quotes/203276969/realtime AFFEX 0.00% . She said that in October 2008, she met with a large institutional client’s investment committee and was “almost fired” after Fairpointe had served the client since 2001.
But the client decided not to pull the plug. “I had another meeting with that foundation probably in January 2010, and that time the equity of that foundation was up 70% for the full year in 2009,” she said. “We had bought some stuff when we were really down and out.” Taking advantage of low prices was an important part of Zerhusen’s strategy.