GFC: Five years on

November 1, 2012, 4:28 pm Aaron Lynch Yahoo7

We all hope this will be as a once-in-a-lifetime event but history tells me that in time, the lessons will be forgotten

Today marks the fifth anniversary of a very important market event: the All-Time-High of the Australian market and the beginning of what history now refers to as the Global Financial Crisis.

I wonder how market participants will reflect on this date in say, 30 and 60 years. Most players will not remember what actually happened in 2007 and what the mood was really like.

I was actively involved in the markets at that time but I don’t recall anyone ringing a bell to announce the market top.

Many saw the initial plunge as a pullback and another buying opportunity. History has a tendency to forget the detail but when it comes to financial matters, it’s the detail that matters.

We don’t see stories written about people who buy at the top. They always seem to focus on those who buy at the lows or find ‘penny dreadfuls’ that rocket from 5 cents to $5.00 in the twinkling of eye.

When the credit crunch hit in 2008, debt markets froze and even banks refused to lend to each other. We all hope this will be as a once-in-a-lifetime event but history tells me that in time, the lessons will be forgotten, including:

The Danger of Debt

At this time five-years ago, companies that were leveraged to the hilt and heavily in debt were about to get crunched. There were many casualties. Some companies are no longer here and others were bought out.

Unbridled Greed

In mid-2007, superannuation laws were changed to allow up to $1 million to be transferred into super’ tax-free. Retail traders who took advantage of this change suffered the unforeseen consequence of dramatically adding to their positions at the top of the market.

Wild Expectations

I also recall practically all the financial pundits - from ‘expert’ to taxi driver – predicting an All Ordinaries Index above 7000- and even 8000-points.

These highs were never reached and have not gone close since. (Of course, they will reach these levels one day but you will have to be very, very patient.)

Chart 1 below illustrates the highs of 2007. Remember this top was not accompanied by the bad news – most of that came in 2008.

Many saw the drop as a buying opportunity and invested more into a downtrend that was about to get a whole lot worse.

Experience tells me that news and sentiment around tops and bottoms are rarely in line with the direction of markets. In times like that, it pays to be a contrarian.

The All-Time-High of the market in Australia on 1 November, 2007 was 6880. It currently sits at around 4500 and has flirted with the 5000 level on a couple of occasions.

Following the fall to 3111 in 2009, we saw a strong bounce followed by a prolonged sideways range. This market presented opportunities for traders but ‘buy and hold’ investors have been disappointed, although recent moves to the upside have improved their lot.

Chart 1 – Bar Chart SPI 200

The current climate is mixed in terms of potential direction. Slowing economies present downside risks but with much of the bad news out of Europe already effectively ‘priced-in’, a base could be forming there.

The US debt level anchor presents a potentially huge long-term drag on global growth. The election will decide the direction of policy regarding this worrying dynamic.

For me, the take-away lessons of the last five-years have not changed. Passive investors will just go with the flow and get the returns they get, but such an approach rarely works out, even in a ‘buy and hold’ strategy.

Others will never return to the markets. It is possible to be a more robust participant in the market but this approach requires time, energy and effort.

The greatest lesson I have learnt in the last five-years is that fortunes can be made and lost - it all depends on what your view was at the critical moments(s). That’s what keeps us coming back.

What did you learn over the last five years?

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