After Lehman: What Lessons Have Investors Learned?

Posted by: Lauren Young on August 31, 2009

We are closing in on the one-year anniversary of the collapse of Lehman Brothers.

I’m looking for individual investors to talk the impact of the market meltdown. Since last fall, what lessons have you learned as an investor? What’s your biggest regret? And, are you doing anything differently now with your portfolio than you did prior to the market meltdown last September?

Please let us know your thoughts. (If you include a real email address when you comment, which won’t be published, I might follow up offline.)

Incidentally, Paul Hynes, principal of Burns Advisory Group in San Diego offers his “Lessons of the Fall” based on Lehman’s collapse last year. (I like Lesson #1 the best.)

Lesson #1 – Avoid excessive risks
Smart people can make dumb decisions, especially when they’re arrogant enough to believe the laws of investing don’t apply to them. One such law is that leverage, the act of borrowing other people’s money to invest, can work both ways—for you and against you. Lehman financed $600 billion worth of assets with only $30 billion of equity. That’s like you putting five percent down to buy a home. It only takes a minor drop in prices to wipe out all your equity—and you still have your mortgage payment. Clearly, this is an example of taking excessive risk.

Lesson #2 – Stay broadly and intelligently diversified
Lehman placed too many of its financial eggs in one basket: mortgages. When the mortgage securities market went bad, it had nowhere to hide. When you concentrate your investments in any single company, industry, sector, or country, you run the risk of being hurt by a catastrophe like the collapse of the mortgage securities market, Bear Stearns, WorldCom, Enron and others. In the end, there’s the chance you won’t be rewarded by the market, and maybe even lose big. Obviously, a broadly and intelligently diversified portfolio of well chosen investments still carries some risk. But we would argue that this is the type of risk most long-term investors ought to assume. When you take the risk of owning a cross-section of the global economy, you have the opportunity to be rewarded over the long-run. Of course, there are no guarantees, and even a diversified portfolio can still lose money, but diversification mitigates the risk.

Lesson #3 – Markets will move against you
It’s not a matter so much of if markets will suffer declines, it’s when, how much and for how long. Suffering through these down cycles is the price that you as an investor pay for the opportunity to earn attractive returns. Unfortunately, you can’t have one without the other. If we learn from lessons #1 and #2 above, then we hope to weather the storm of volatility and expect to come out of it in good shape for the recovery, when it occurs.

What do you think? What lessons have you learned? What mistakes do you regret since the market crashed? Here’s your chance to let others learn from your experience.

Reader Comments

Karl

August 31, 2009 5:39 PM

Investors should LEARN, & know that all those 'TOXIC ASSETS' are still on the books of all these banks, & investment banks, & other financial firms! The $700 BILLION 'TARP' was used to make 'capital injections' to prevent another DEPRESSION, right? It WASN'T used to buy-up these TOXIC ASSETS, correct? So, a smart investor would get OUT of the stock market COMPLETELY!!! Right NOW!!! It's all going to come to a head eventually, wouldn't you agree? That's when STOCKS, 401K's, IRA's, PENSIONS, & other investments that are INVESTED IN THE STOCK MARKET will go down! WAY DOWN!!! WAY, way, way, down! Thank you.

Saadat A. Khan

September 1, 2009 1:31 AM

Investments should be built in the way an automatic self-winding watch is built. It accumulates in one direction only, and there is no way to release the energy through the gear mechanism except in a controlled manner to provide energy to power the timepiece. So very simply, you invest in a diversified portfolio focused on growth opportunities, like Green Energy, Affordable luxuries which the emerging markets which large populations are developing a habit for, but put a stop loss on each investment - exit the position - no matter what, when you lose, say, 20% of value because of market movements . Don't rationalize the 'reasons' of the decline, or listen to the 'experts' at this time. Exit the position and wait for value to recover, and then enter again when the a new trend establishes itself. Is it so difficult? Not really. Don't be greedy, stick to a methodical approach. Saadat Khan, Director, Aerotel Group.

pp

September 1, 2009 8:03 AM

True Karl, completely agree

Why ask the hapless investor

Rather Ask -

Q1: Have banks learnt that they shouldn't be utilizing gaping financial regulatory holes to screw the whole economy.

A1: Answer is No! because Fed will bail out anyway so why worry


Q2: Have legislators putting in tough regulatory measures to contain the damage.

A2: Again Answer is No! because wall street controls washington street..
Lobbyists & all.


Ask some serious questions to those who caused the damage & those who continue to support the white colar loot.

tmak

September 1, 2009 2:45 PM

It came too easily,quickly, and abruptly
Like quantum leap and cessations of a giant empire,
suddenly empty out, as if someone in critical sickness
The physical going thru the learning process applications interactively in real life situations.
How to contour maping using topologies and transformations to inverse such rapid sudden collaspe!

Peter Rogers

September 3, 2009 7:02 PM

Before you think about the return on your money, you must focus on the return of your money.

It's amazing that many so-called professionals forget this simple lesson.

There would a great deal more investors in the market today, if they redesigned their protfolio to recover their original investment principal, regardless of how their securities performed.

Pete Nikolai

September 11, 2009 5:46 PM

I agree that the returns provided by a diversified portfolio justify the risks, but I have also come to the conclusion that buy-and-hold is not a valid strategy. I now prefer what I call Long Term Market Timing in which I utilize the 50- and 200-day moving averages of the S&P 500 to dictate when I will be invested in stock funds and when I will be in money market funds. See http://www.facebook.com/group.php?gid=160977705305

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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