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Monday, September 12, 2016

A Different Anniversary

Opinion: No investor is paying attention to this important anniversary

Published: Sept 9, 2016 5:17 a.m. ET

Lehman Brothers’ bankruptcy, eight years ago, reminds us that we can rarely predict a calamity


MarketWatch photo illustration/Getty Images
Lehman Brothers’ Richard Fuld was the longest-tenured Wall Street CEO (14 years) when the bank filed for bankruptcy Sept. 15, 2008.

CHAPEL HILL, N.C. (MarketWatch) — Next week we observe not only one anniversary, but two.
The first, of course, is the 15th anniversary of the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon. The second is the eighth anniversary of Lehman Brothers’ collapse.

Unsurprisingly, the former is getting the lion’s share of attention. And the latter is getting virtually no attention.

And that’s a shame, since many valuable investment lessons can be learned by reviewing it from the emotional distance of eight years.

For those of you with hazy memories, the New York-based company declared bankruptcy Sept. 15, 2008. It had been the fourth-largest investment bank in the U.S.; its bankruptcy was the biggest in U.S. history.

The aftershocks were disastrous. Some leading money market funds were unable to maintain their net asset value and began selling for less than $1 per share, a phenomenon known as “breaking the buck.” Liquidity dried up overnight, and many sectors of the economy came to a standstill. The stock market plunged: The Dow Jones Industrial Average shed 25% over the next 30 days — a quarter of its value in just four weeks, in other words.

It easily qualifies as the most momentous financial event in U.S. history in decades.
And, yet, no one saw it coming.


The reason to note that today: Another event as momentous as Lehman Brothers’ bankruptcy could happen again. And we’re kidding ourselves if we think we can anticipate when it will occur.
If you don’t believe me, consider the evidence from the Hulbert Financial Digest’s performance tracking of dozens of stock market timers. Those who had the best track records going into September 2008 had far higher average equity exposure levels on Sept. 15 than those with the worst records. In other words, your best bets for sidestepping the post-Lehman bloodbath would have been those with the worst track records up till that point.

Let me know if you want to pick your advisers that way — I have a bridge I want to sell to you too.
The broader investment lesson is that terrible things sometimes happen, and they are unpredictable — either in practice or inherently.

And while you might think it is banal to point out this truth, you’d be surprised how many of us lead our investment lives as though it isn’t true.

Especially now, after nearly two months of unusually quiet trading on Wall Street and with the CBOE’s “investor fear index” — the volatility index, or VIX — at close to multi-year lows.

Disasters like Lehman Brothers’ collapse can occur at any time, without warning. And when they do, the stock market will plummet. If such a decline would be intolerable to you, then you should reduce your equity exposure now to whatever your comfort level would be during such a disaster.

After all, the worst thing to do is to wait until disaster strikes and sell into the panic that immediately ensues in its wake.

For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email mark@hulbertratings.com.

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