Chairman of Balentine and author of First Generation Wealth: Three Guiding Principles for Long-Lasting Wealth and an Enduring Family Legacy.
Many of us have a war story, and if you have worked in finance for any length of time, yours likely involves the Great Recession. As we approach the 15th anniversary, I’m reflecting on that time.
In February of 2008, I won a once-in-a-lifetime trip at a charity auction to fish in Mongolia. Fast forward to September, when it turned into two once-in-a-lifetime moments—a spectacular fishing trip, and the financial meltdown of 2008, observed from a distance on the literal other side of the world.
Having reached the storied spot in Northern Mongolia via a flight to Seoul and a two-hour helicopter trip from Ulaanbaatar, we were cut off from Wi-Fi, phones and computers the entire week of September 15, 2008. When we wrapped up our trip and returned to our hotel, we heard the shocking news. While we had fished, back home, the $40 billion portfolio I oversaw for clients at my then-employer plummeted.
While I was shocked at how markets had responded, I recognized intuitively that the world had changed irrevocably. Would it have felt different if I’d been sitting in my office, watching the financial world collapse? I’ll never know, and I’ve come to appreciate the distance.
Alan Greenspan famously said in 1999 that bubbles are difficult to spot in advance, as it requires believing that somehow, hundreds of thousands of investors have it wrong. If you subscribe to that school of thought, maybe you wonder if we could have seen it coming.
But that’s the benefit of hindsight; today we can look at what was going on and understand that if a bank is willing to lend you 100% of your mortgage and the value declines, it’s going to be a disaster—not only does the homeowner lose the house, the bank can’t get its money out of the returned asset. And we learned that leverage works both on the way up, and on the way down.
Of course it happened. Minsky moments and black swan events were possible, after all.
Patience and practicality are key.
The Great Recession wasn’t really a once-in-a-lifetime moment; it was a probable outcome. How do we avoid another meltdown in the future?
My own investment philosophy is more practical and more conservative than ever, but I don’t operate from a place of fear. I simply acknowledge that you can’t get rich quickly, and I remember the truism, if it sounds too good to be true, it probably is. Practically speaking, we return to the basics of sound investment strategy—what we think of as the cardinal rules at my company.
Manage risk rather than return.
Investment management involves managing risk, rather than return. That means considering not just what can go right, but what can go wrong. Recognize that your greatest assets—and your clients’—have nothing to do with money, and consider how they connect to your life strategy and your legacy. Especially for first generation wealth makers, this consideration is paramount.
Remain levelheaded.
Leave emotion out of your investment strategy; fear and greed will always win. That’s my biggest takeaway from the Great Recession. Focus on what you can control, and know when to “fire yourself” and get expert guidance.
Pay attention to the details.
When it comes to your investments, understand the complexities and read the fine print. Make sure you have an expert partner with a global view of your investments. It’s the only way to protect yourself from hidden vulnerabilities, and may also be the key to revealing subtle opportunities.
Take the long-term view.
When it comes to strategies like diversifying, and timing and understanding the markets, know that expert forecasting is neither an art nor a science. Investments can only be managed with a long view, so remember once again—if it sounds too good to be true, it probably is.
Expect the ebbs and flows.
The French have a saying, “Plus ça change, plus c’est la même chose,” meaning “the more things change, the more they stay the same.” The point is that the pendulum swings back and forth between fear and greed and has forever. It’s no different than tulip bulbs in 17th century Holland, the South Sea bubble in the early 18th century or internet stocks in the late 1990s. The housing crisis in the mid-2000s was no different.
With the perfect clarity of hindsight, we know why the Great Recession happened. Will we remember it long enough to ensure that it doesn’t happen again?
Charles Mackay, writing in 1841, famously said, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
We will never be able to predict the future, but I do believe that an unemotional, data-driven investment process enables investors to minimize risk. And one by one, as wealth managers adopt this approach, recovery is possible.
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