Markets are starting to rise from the rubble

One of my favourite teenage movies was Rocky and the famous quote “Life's not about how hard of a hit you can give... it's about how many you can take, and still keep moving forward.”

Markets are the same. They go down, but then, all of a sudden, out of nowhere, they can get back up off the floor and push to new highs when nobody expected.

The lessons of the 2008-2009 financial crisis continue to reverberate for me today, serving as stark reminders of the financial markets' inherent volatility. Yet these aren't merely cautionary stories; they're valuable lessons for any investor in the market.

I was working as an analyst at Morningstar when the crisis, triggered by the subprime mortgage bubble in the United States, first began to unfold. It was an eye-opening experience to see firsthand the dramatic fallout of investments in complex derivatives like collateralized debt obligations.

A lack of understanding of these financial products masked the substantial risks lying beneath the surface, a painful lesson I took to heart: to invest only in what one truly understands.

The crisis also demonstrated the importance of timely decision-making, even when it means admitting a mistake. The collapse of Bear Stearns, a global investment bank, in 2008, served as a vivid example. Investors who sold off their holdings, despite the pain, fared better than those who held on, hoping for a reversal. Anything was better than zero.

In the crisis's aftermath, the art of learning from our missteps became a vital survival skill. The experience, followed by the subsequent European banking crisis, forced me to think hard about the career I wanted to build. It encouraged introspection, an examination of where I'd overreached or placed too much faith in the notion of 'too big to fail.' This self-evaluation became the stepping stone to stronger, more resilient investment strategies.

Lessons from the 2008 crash

A pivotal lesson from the crisis was the danger of confirmation bias. Many investors, so sure of their investment thesis's correctness, focused only on supporting information, blinding them to the looming disaster. The experience underscored the need for intellectual humility and rigorous testing of any investment thesis.

The heady days leading up to the crash also emphasized the importance of staying grounded amid market mania. Frenzied excitement, which paid scant regard to underlying market fundamentals, fueled the US housing bubble's inflation and subsequent burst. This spectacle served as a sobering reminder of the perils of speculative hype.

That is why I’m totally ignoring the hype buzz words at the moment and sticking to what I love – real estate and hard assets with some exposure to a very well diversified stock portfolio.

Despite the devastation wrought by the crisis, it was during these challenging times that I observed opportunities for reinvention and innovation. Companies like Uber and Airbnb emerged from the downturn's ashes, capitalizing on the evolving digital landscape and shifting consumer behaviors. This observation prompted my career transition into real estate investment and development—a field I believed was ripe for innovative approaches.

One thing that I underestimated, however, was the power of markets to fight back, bigger and better than ever. This resilience serves as a testament to the enduring dynamism of capitalism, even in the face of significant adversity.

As we've moved further into 2023, I've observed a somewhat worrying trend. The S&P 500’s advance this year has been driven by fewer than 10 mega-cap stocks, while the rest of the market has stagnated. What does this tell us about the underlying economic momentum? The answer could have significant implications for asset allocation in the second half of the year.

As we reflect on the past and glean lessons from the 2008-2009 financial crisis, the insights gained remain as relevant as ever, providing a beacon to navigate the ever-evolving investment landscape.

By remembering our past and learning from our experiences, we can approach the future of investing with wisdom, resilience, and a keen eye for the lessons that history continues to teach us. I’ll have a different note next week following on from my mental fitness and leadership development podcast episode last month.

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Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.