OB Report
October 2018
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Lessons from the Financial Crisis,
10 Years Later

Murray Leith By Murray Leith CFA, Executive Vice President & Director, Investment Research

page 1_imageA decade ago, the lead article in the October OB Report was titled “Financial and Economic Disaster Averted.” In it, we declared, “September 2008 will be regarded as a month of monumental importance in the history books. It will be remembered as the climax of the biggest financial crisis since the Great Depression. In our view, it will also be remembered as the month that the global financial system was given a new lease on life and a worldwide crisis was avoided.”

With the benefit of hindsight, we can proudly say that our optimism was well rewarded. In the decade since the shocking bankruptcy of Lehman Brothers on September 15, 2008, the Odlum Brown Model Portfolio has grown at a compound annual rate of 11.7% and tripled in value.

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While the magnitude of the recovery has been impressive, it’s also worth recalling the intensity of the emotional rollercoaster which followed the demise of Lehman Brothers. Indeed, markets got a lot worse before they got better.

When we were writing the October 2008 newsletter in the later part of September, the Canadian and U.S. equity benchmarks had experienced peak-to-trough corrections of roughly 20% and 25%, respectively. By the time stocks finally bottomed in March 2009, those markets had fallen more than 50% from top-to-bottom. 

While we survived the storm and have done well over the long term, it’s worth appreciating how wrong our hopeful and confident commentary seemed in the short term. Most remember the Lehman Brothers bankruptcy as the climax of the crisis and forget that it was the subsequent politics and uncertainty around the bank bailout plan that rattled investors and caused the most damage to investor portfolios.

At the time, we couldn’t believe that the Democrats and Republicans would disagree so intensely about the merits of the Troubled Asset Recovery Plan, or TARP as it was called. Didn’t they realize that the bottom was falling out of the financial system and that the world was on a fast-track to another depression? Fortunately, sanity ultimately prevailed, as it normally does. TARP was passed into law, the financial system was saved and an economic recovery ensued. Nonetheless, the stock market underwent a grueling six-month bottoming process and many panicked as stocks dropped further than anyone thought possible.

With this experience well engrained in investors’ minds, it’s not surprising that some are anxiously wondering if we are overdue for a correction nine years into an economic expansion. U.S. stocks have experienced a record-long bull market – a consecutive stretch without a 20% correction – and for many that is reason to be on high alert for a setback. Others worry that Trump and trade wars will precipitate a global recession and market downturn.

The aforementioned are reasonable concerns, and are certainly things that we consider when evaluating the relative attractiveness of stocks and economic sectors. Yet in general, we don’t believe assessing the odds of a correction is a productive exercise. Timing the market is not a play in our portfolio management playbook, and we firmly believe that those who try to anticipate market corrections will do worse than those who accept market volatility and stay invested.

We are purposely highlighting our inability to correctly predict the short-term path of the stock market during the Financial Crisis to reinforce our view that the timing and magnitude of corrections are unpredictable. 

Rather than trying to gauge the odds of a correction, the better consideration is to ponder, “How am I going to react when the inevitable correction arrives?” The answer needs to be, “I’m not going to do anything” or “I’m going to buy more.” After all, those who sold in March 2009 have paid a very steep price.

If you are nervous and worried that you might sell stocks on a pullback, then you should work with your investment advisor to adjust the asset mix in your portfolio to reduce volatility. The right asset mix is different for everyone, and it’s important that you are confident in your investment posture so that you have the conviction to hold great businesses through the good times and the bad.

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The Odlum Brown Model Portfolio is an all-equity portfolio that was established by the Odlum Brown Equity Research Department on December 15, 1994, with a hypothetical investment of $250,000. It showcases how we believe individual security recommendations may be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Trades are made using the closing price on the day a change is announced. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance.

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