Every financial crisis is different in its own way, but they all share common characteristics. Can investors learn from the experience of 2008 and apply that to what we see happening in the market today?
During a recent interview with the CFA Society of Chile, value investor Howard Marks (Trades, Portfolio) gave his thoughts on the differences and similarities between 2008 and 2020.
What’s the difference?
The big difference between 2008 and 2020 is of course that the Great Financial Crisis started from within the market itself (as a result of the irresponsible lending practices of systemically important institutions), whereas today’s problems started outside the system. However, this doesn’t mean that investors and corporations haven’t contributed to today’s troubles.
Although he acknowledged that the current market uncertainty was obviously an exogenous event outside the control of investors, Marks believes that the behaviour of many firms and governments preceding the crisis during the last decade laid the groundwork for the fallout that they are experiencing now:
“It’s very popular in the United States nowadays to say “it’s no one’s fault, they didn’t make a mistake, they didn’t cause the problem” and certainly that’s true, but it was also certainly worsened by the fact that we were at a cyclically high level. Another similarity to the global financial crisis is that the Fed and the Treasury came to the rescue back then too - it took them some months to figure out what to do and to get legislative support from Congress, but eventually it was successful. This time, they used the playbook from that crisis and did everything in a matter of weeks, at great scale, and apparently with great success.”
In other words, it’s not completely accurate to paint the picture of the March crash as a purely exogenous one. There is no doubt that cheap debt and profligate spending practices by corporate treasuries (exemplified by the aggressive share buyback schemes of the last few years) created the circumstances for the precipitous sell off that surprised so many investors.
This episode illustrates the appeal of value investing. If you buy and sell companies based on factors like the strength of their balance sheets, robustness of cash flow and low valuation, rather than chasing returns by buying expensive stocks that have been bid up by other speculators, you can certainly prepare for exogenous events (even if you can't predict them).
Disclosure: The author owns no stocks mentioned.
Read more here:
- Guggenheim's Chief Investment Officer: Stocks Will Continue to Rise
- The Value Investor's Handbook: More Lessons From the Cash Flow Statement
- Warren Buffett on Dividends
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