The Financial Crises Ten Years Later

Much has been written in recent days about the financial crises ten years ago. The major themes of the articles are: (1) what caused it? (2) can it happen again? and; (3) when will the next market crash come? From the crises low during March 2009 through September 4, 2018 the S&P 500 has increased approximately 186% ex dividends, which is equivalent to an approximate annual return of roughly 10.86% ex dividends. For much of the same period, 10 year U.S. Treasury Notes have largely traded in 2% the 3% yield range, which implies an equity risk premium of 8% to 9%. See the charts below for SPY ETF prices as a benchmark for the S&P 500 and ten year treasury yields between January 2009 and September 2018.

Investors prescient enough to be out of the stock market before the crash who then jumped into the S&P 500 index as a passive investor in March 2009, at the crises lows would have earned the market return of 10.86% ex dividends per year. Investors who parked investment dollars in a fund that was invested in the S&P 500 and managed by a professional money manager at the March 2009 lows had about a  90% chance of being beat by the market, so their S&P 500 holding period return (net of fees) was likely less than 10.86% ex dividends.

The odds of putting money to work at the march 2009 low and holding on for a decade for professional fund managers or individual investors is extremely low. Looking backward, we know that the market beat 90%+ of small, medium and large cap money managers during most of the ten year period since the crash.[1] We also know that investors putting money into the stock market at the crises lows faced an unprecedented level of uncertainty looking ahead into the future. Investors who stayed out of the stock market in the U.S. after early 2009, missed a long bull market and part or all of a of a 186% gain, which was a much higher return earned by those who played it safe by buying  2% to 3% yield to maturity ten year treasury bonds or staying in cash equivalents.

Today, ten years after the crash there are a steady stream of opinions about the next crash or not, put out by investors on main street and Wall Street. The reality is that the "next crash or not," is very difficult to, if not impossible to reliably predict in terms of timing, effect and magnitude. Simply put, this kind of certainty does not exist in the markets, in my opinion.

Some of the most sophisticated and successful professional investors (pros) I know spend little if any time predicting the future of the economy or markets in an effort to time the market. They also stay invested and tend not to be focused on timing their entry or exit from markets. Pros are constrained by factors such as investing mandates, flow of funds in and out of their funds at suboptimal times and benchmark tracking, that can hurt their performance. The professional investing community is a talented hardworking group of people with the skills and resources that have an advantage over individual investors but tend to cancel each other out, making it very difficult for them to beat the market in any given year or series of years.

Markets are dominated by pros that have advantages over less sophisticated individual investors in terms of training, research and knowledge of how to use information flow among other factors. Despite this, pros cannot reliability time the economy, the market or other factors that may affect the financial markets. Individuals who try to compete head on with the pros have little chance of beating the market. On the other hand individuals do have some legitimate advantages over the pros that include, self defined and theoretically unconstrained investment horizons, personal discretion to be in the market or not, asset allocation discretion and investment strategy flexibility, among other factors.  

Similar to the pros, individual investors have no advantage or edge in terms of practicing market timing. Anecdotally speaking, I have yet to meet an individual investor who has been successful and beat the public markets over time through market timing based on economic or market forecasts. In other words trying to jump in and out of the market around recession and economic forecasts is difficult to bordering on impossible and therefore is not a viable investment strategy.

Ten years after the crash the best investors that I follow and mimic, spend little time trying to predict the next one as their and my investment strategy is not based on market or economic forecasts. I have had little success in the past trying the time the market or attempting to figure out its direction day-to-day and month-to-month, etc. based where I think the economy might go. The lesson from previous market crashes and dislocations is that forecasters do not accurately forecast them as to timing and severity. The case can be made that top down predictions of future recessions and market collapses will be no better than past predictions.

As a bottom up individual investor I do not focus on market and economic or market collapse forecasts as my primary lens is a focus on buying small pieces of equity of public companies that can be held onto for many years, if not longer. I have also been a buyer of debt, commodities and real estate, among other asset classes. I have not used leverage in my accounts. I typically invest in companies that are reasonably financed, have a competitive advantage and the potential to earn high ROIC’s well above their weighted average cost of capital. I have invested in small, medium and large cap stocks in Asia, Europe and the United States and also in ETF’s from time to time. My portfolio has been weighted toward large cap U.S. companies that do business in the U.S. and abroad.  I identify investment targets through my own primary research and the research of others.  Most of my current equity positions were purchased when the company I invested in was out of favor on Wall Street due to worries, concerns and company difficulties at the time of purchase. In recent years I have also invested alongside select activist investors that I follow. My portfolio typically consists of no more than 10 to 15 positions and typically includes heavy concentration in 3 to 5 positions.  I attempt to reduce the correlation between the positions through security selection and by running several investment strategies at once, e.g. growth, value and special situations investing in equity; debt and commodity investing; and event driven bets such as the Greek debt crises and the Japanese tsunami disaster, among others.

I have not managed the portfolio against benchmarks, but for illustration purposes below I compare my results against the S&P 500 index due to the large proportion of large cap U.S. stocks in my portfolio. In recent years my returns have approximated the S&P 500 while holding significant liquid cash equivalents (i.e. 20% to 30% of the portfolio). The portfolio has outperformed the S&P 500 in the current year and the last 12 months due to the performance of stocks that I purchased several years ago as well as a reduced cash weighting. I have made no effort to time the market and held several stocks for years with my biggest bet held more than a decade (i.e. before the previous market crash).

Total return	YTD
At 8/31/18	2018	1 yr	3yr	5yr	8yr
Portfolio - A	15.78%	30.45%	16.89%	13.95%	14.48%
Portfolio - B	21.00%	39.00%	16.30%	14.00%	19.60%
Combined total	17.14%	32.67%	16.74%	13.96%	15.81%
weighted average return
S&P 500 return	9.94%	19.66%	16.11%	14.52%	10.60%
Excess return - A	5.84%	10.79%	0.78%	-0.57%	3.88%
Excess return - B	11.06%	19.34%	0.19%	-0.52%	9.00%
Return above S&P 500 index	7.20%	13.01%	0.63%	-0.56%	5.21%
- combined

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[1] Per "Risk-Adjusted SPIVA Score: Evaluation of Active Managers' Performance Through a Risk Lens" research published by S&P Dow Jones Indices, for year-end 2017.