The following is a recent excerpt from the Financial Times in an article titled, “The legacy of Lehman Brothers.”
“One year ago, the US authorities allowed Lehman Brothers to collapse, unleashing chaos. Capital markets froze, banks stumbled and a cascade of collapses seemed imminent. The financial system was seized with fear. A high-speed repeat of the American banking crisis that underpinned the unique misery of the 1930s threatened.”
With almost a 22% decline in the S&P 500 during the fourth quarter of 2008 and another 11% decline in the first quarter of 2009, fear was rampant. Nouriel Roubini, Dr. Gloom, was seen almost daily on the business news networks, at one point forecasting a continued drop in the stock market to Dow 4000. Warren Buffett stated multiple times during the crisis that the U.S. was engaged in an “economic Pearl Harbor”.
With all of that said, it is absolutely amazing that the long term investor can look back over the past twelve months and see that the S&P 500 is only down 6.9%. An amazing rebound of almost 60% in the stock market from the lows of March 9, 2009 has turned many in the media from negative to positive, albeit cautious. It is also amazing to note that the last 12 month return on the S&P 500 between 8/31/09 and 9/30/09 jumped from minus 17.9% to – 6.6%, caused by simply dropping off one bad month (Sept 2008 -8.8%) and adding one good month (Sept 2009 +3.7%). The change should even more dramatic on October 31, 2009 when we drop off October 2008’s 16.8% loss. Hopefully!
This is a great example the volatility of the stock market and the value of focusing on the long-term future, not the short term. For a moment, let’s take a step back to the beginning of 2008. How many of us would have predicted that oil would go to $150 a barrel, Fannie Mae and Freddie Mac would be nationalized, GM and Chrysler would be saved by the government, large business icons with storied histories like Bear Stearns, Merrill Lynch, Washington Mutual, and Wachovia would be purchased for pennies on the dollar by other U.S. firms, and American International Group (AIG), once a triple AAA rated company (there are only 5 remaining) would have to be saved by the government? Thus, our prediction for the future…….successful investors maintain broadly diversified portfolios focused on 5 to 10 year future timeframes.
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