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Lessons Learned from the Great Recession of 2009

Tuesday, March 20th, 2018

I can’t believe it has now been nearly 10 years since I went through March 2009, when it appeared the world was coming to an end. I will say it came very close because the U.S. banking system was pushed to its limit. At that time, same as I have done my entire investing career, a major focus was to invest in fundamentally strong companies with pillar strength balance sheets which could weather any storm. Finding value at the time was rather easy with many companies trading at three to six times earnings, something I had never seen in my career. Valuations were so good it seemed as though I was stealing companies. I received a call last week from one of our client’s CPA who was doing their taxes to verify the capital gain on an equity sold in 2017. The reason for the call was the gain was around 900% on the equity. We doubled checked the number for the CPA and yes, the cost basis was correct.

That sounds great now but believe me back in 2009 I can’t count the number of times I answered the question, “Brent are you sure, everyone else is selling and you’re buying”. My response was always the same, yes, I’m sure, the only way we will be wrong is if the government goes broke and if that happens it doesn’t matter what you did with your money because the dollar will be worthless.

It is hard for me to fathom a bank we invested in back then, the gain on that investment has also been one for the record books, I’m glad to say not only do we still hold that bank, but we are still buying it today and it makes up the second largest holding in our portfolio. I’m also proud to say the dividend yield from the bank investments I made back then is now exceeding a 11% yield for clients who invested their dollars and they gave me their trust.

Many brokers, investments advisors, financial planners or whatever they called themselves either left the industry or were forced out because they could no longer make money. This was probably a good thing since many of those people were just sales people who had no idea what they were doing anyway. The downside was unfortunately many investors discovered when the markets went into a tailspin their financial advisor had no clue what he or she was doing, and the investors paid the price.

Could it happen again? One can’t ever say it won’t. However, I say possible but not likely. Why? Whenever the U.S. encounters a problem we are resilient enough to fix it, so it won’t happen again. So now our banks are the strongest they have ever been and could handle a 1929 type depression and still be in business. I don’t see any major economic problems for at least the next few years. We have a growing economy, low interest rates and a pro-business administration.

The next major downturn will be something different, my educated guess would be the insurance industry will have problems handling rising interest rates and declining bond values while their annuity holders become disenchanted with their low yields and begin cashing in their low yielding annuities for other higher yielding investments such as CD’s. Yes, in the future CD’s could have much better yields. This could cause a liquidly shortage as the insurance companies are forced to redeem long term bonds at a substantial discount.

And what is the lesson learned from the great recession in 2009? First, be sure the person who is giving you financial advice understands finance and is not just selling you products. Be careful, because many sales people are good at masquerading as experts and you can’t see who isn’t wearing a bathing suit until the tide goes out and by then it’s too late. Also, understand your investments and make sure they make sense. Don’t get tied up in the hype or think it’s a great investment just because others are investing. Don’t be afraid to ask the hard questions and by all means use common sense, if it’s too good to be true, well, it probably is.

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