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John Huber
John Huber
Articles (117)  | Author's Website |

Market Panics in Hindsight

For each of these great panics, there were scores of smaller panics that seemed very significant at the time, but in hindsight look like nothing more than a blip on the radar

March 23, 2020

Do you remember where you were on Oct. 27, 1997?

Probably not. I don’t either. But on that day, the Dow plunged 550 points, which was roughly the same amount in percentage terms (7%) as today’s 2,000-point drop. In the late 1990s, the Asian financial crisis was the reason for that panic. But like many panics, as time passes, they seem to be much less meaningful in the rear view mirror.

Of course, this isn’t true for all panics. We will never forget events such as the 9/11 tragedy, or Sept. 15, 2008, when Lehman Brothers filed for bankruptcy, precipitating a swift run on the financial system and a severe economic contraction that the country hadn’t seen since the Great Depression. There was the Panic of 1893, which led to a depression that was arguably as severe as the Great Depression (and, in fact, was called just that until the Depression of the 1930s arrived). And, of course, there was the Great Depression itself.

But for each of these great panics, there are scores of smaller panics that seemed very significant at the time, but in hindsight look like nothing more than a blip on the radar.

The forgotten "panics"

Examples of such “mini-panics” that felt like full-blown panics at the time include the 1998 Russian debt crisis, where Moscow shocked the world by defaulting on their own ruble debt. The chaotic price movements in the markets crushed a hugely leveraged hedge fund called Long-Term Capital, which nearly drowned the banking system with its massive trading liabilities. The fund was bailed out by its own lenders (thanks to some strong-arming by the New York Fed) and this prevented the fund’s immediate liquidation, which stopped the panic.

Another panic occurred in 2011, where fears of a “double-dip” recession (remember that term?) coincided with political gridlock and a debt ceiling standoff that led to the first ever downgrade of the credit of the U.S. government. This seemed like a big deal at the time, and the market plunged roughly 17% from peak to trough, with many bank stocks and other cyclicals down 40% or more.

There was the Panic of 1907, where the failure of a major New York financial institution led to a city-wide run on the banking system, which drained liquidity from the economy and caused a sharp contraction as merchants couldn’t fund their inventory and corporations couldn’t make payroll. This crisis was historic because it eventually led to the creation of the Federal Reserve, but in fact the panic and subsequent downturn turned out to be very short-lived (I’ve written about this fascinating situation here and here).

And in the aforementioned 1997 panic, fast-growing Southeast Asian export nations (“Asian Tigers”) relied on foreign investment to finance their economic growth, but they went bust when rising U.S. interest rates made it harder to compete for foreign capital and a stronger dollar made exports less competitive for these dollar-pegged nations. The Tigers allowed money to freely flow into their countries in good times. But where money can easily enter, it can also quickly exit, and in 1997 an effective run-on-the-bank occurred in these nations, resulting in painful devaluations and economic collapses. This led to a major selloff across the world, and in fact was the last time (until today) that the U.S. stock market used its “circuit breaker” to shut down trading after markets plummeted.

There were even smaller scares such as the bond market debacle of 1994, the SARS outbreak in 2003, the “Flash Crash” in 2010 (also accompanied by the dreaded double-dip recession fear), the OPEC-fueled oil price rout (sound familiar?) that led to the worst start to the year in stock market history in 2016 and most recently, the trade war that caused a peak to trough drawdown of nearly 20% in the S&P 500 in the fourth quarter of 2018.

These mini-panics are only a small sample. There are countless examples that you can find when reading about the Go-Go years of the 1960s, the stagflation years of the 1970s and the junk bond years of the 1980s.

There are a number of lessons that can be learned by studying these past events, including the pattern of behavior that is so eerily similar in each of these panics, but there are two other takeaways I’ll mention here:

  1. Notice the number of Dow points that a 7% drop was in 1997.
  2. Notice how little you care about (or even remember) the vast majority of these mini-panics.

550 points used to be scary

Referencing Dow points is usually a useless exercise, but I use it to show how far the market has come from the days when a 550-point decline was a panic that required a temporary closure of the market.

My point is the stock market rewards investors who are long-term-oriented and patient. Investing isn’t easy, but it is simple. Owning a stake in a broad swath of American companies and ignoring the inevitable ups and downs is a surefire way to achieve success over time.

A quarter century from now, a 2000 point decline will likely be a much more normal 1% to 2% drop, just like a 550-point drop is today.

Stocks appreciate over time, and long-term investors get rewarded.

Time heals all wounds

Three years from now, we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics wind up being “mini-panics” in hindsight, and they also turn out to be fabulous buying opportunities.

They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.

But they all seemed scary at the time.

And they were all great opportunities to buy stocks.

The time arbitrage loophole

I don’t know if this current coronavirus panic accelerates before it subsides, but I do know it will subside. And at some point, when enough time passes (often not much time is required), we’ll all agree that this was a great time to buy stocks.

What creates opportunity in markets is that in the current moment, we don’t all agree. Some view this as a buying opportunity, others think it’s a great time to sell stocks, or that it’s prudent to wait for “more clarity.” This disparity of interpretation is why stocks get mispriced. I’ve talked often about how Saber’s investment approach relies on time horizon edge, and this is a perfect example of why this approach can be successful over time. Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects for the business.

Some investors are in fact panic selling out of fear, others are more rationally selling because they don’t want to own a business that will have a bad year. And this creates opportunities for those who want to buy a stake in companies as a long-term part-owner.

Steve Jobs used to tell people to go for a walk and “zoom out”, to change your perspective and to look at the big picture. Sometimes it helps to zoom out and detach yourself from the current situation.

I don’t know what happens tomorrow or next week, or next month, or next year. But I am confident that we’ll look back in a few years and identify this as one of those times where it was great to be a buyer of stocks.

John Huber is the founder of Saber Capital Management, LLC. Saber is the general partner and manager of an investment fund modeled after the original Buffett partnerships. Saber’s strategy is to make very carefully selected investments in undervalued stocks of great businesses.

John can be reached at [email protected]

About the author:

John Huber
I am the portfolio manager of Saber Capital Management LLC, a Registered Investment Advisor (RIA). Saber is an investment firm that manages separate accounts for clients. I established Saber as a personal investment vehicle that would allow me to manage outside investor capital alongside my own. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

By using separate accounts, Saber offers its clients complete transparency and liquidity (the funds are held in the name of the client and cannot be accessed by the investment manager). Saber looks to partner with like-minded clients who are interested in a patient, long-term approach to investing that is rooted in the principles of value investing.

I also write at the blog www.basehitinvesting.com.

I can be reached at [email protected]

Visit John Huber's Website


Rating: 4.9/5 (9 votes)

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Comments

Bruce Bohannon
Bruce Bohannon premium member - 4 days ago

Thanks John. Always a pleasure to read your work. Looks like there are some 6" bars to step over these days.

anthonypape37
Anthonypape37 - 1 day ago    Report SPAM

You seem like a nice enough fella. I would argue that the only people selling out of rational thought are those that are in need of the money to spend on living expenses. In the a absence of withdrawal from the stock market as a pre-planned move from savings into spending then you are engaged in the zero sum aspect of stock speculation. No one has ever beaten the market index in periods over 20 years. No doubt a reason why Warren Buffet was able to bait a Hedge Fund Manager to bet $1 million to see if he could beat Warren's investement in a vanguard index fund. Take your 10% and be happy with it. There really should be no buying opportunities as money free to invest was money sitting foolishly idle and being eroded by inflation. Money that missed the best 10 years of explosive growth I can remember.

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