The "Panic of 2008" is now old news. Though employment numbers are lagging (they always lag), the stock market has since recovered a great deal of it's losses. But what have we learned?
Unfortunately, most people haven't learned anything. They didn't know what they were invested in to begin with because they left their investing to the brokerage firms that ran their 401Ks and pensions. If they were among the few people that did know what they were invested in, they probably didn't know why. They chose where to invest their hard earned money based upon social proof, groupthink, and because "everybody else was doing it." And off the cliff the lemmings went.
Here are a few lessons you should have learned:
1) Markets Crash Unpredictably, and Rise Unpredictably
You would think this is common sense, but few people I know had a plan on what to do when the market began to tank. Uncertainty and fear were the prevailing themes. What is your plan if the markets crash again? They WILL crash again. I don't know if it will be this year, 10 years from now, or 30 years from now. And I don't know if they will fall by 20%, 50%, or 80%, but they WILL fall at some point. What will you do? If your relying on the money managers that run your 401K, by default your plan is to let other people take charge of your financial future. Is this a good idea? If you intend on selling, what will you sell and when? If you intend on buying, what will you buy and when (and how?)? Develop your plan now for bull and bear markets and there will be no surprises.
2) Remember the Fundamentals
Buy low, sell high. Sounds easy right? Then how come (almost) nobody was doing it? The answer to that question is that in addition to the fact that most people don't know when the price of a stock is high or low, there is a very strong psychological pull to do what everybody around you is doing (PANIC!). In my opinion you MUST learn how to value a business if you intend on investing, and you MUST be capable of rejecting herd mentality. If honest self assessment leads you to think you are incapable of either of these skills and you decide that it is best to let others invest your money for you, you MUST make sure they possess these skills. Otherwise you are gambling.
In the 25 days of panic following the collapse of Lehman Brothers in 2008, Warren Buffett's Berkshire Hathaway invested $15.6 billion dollars when everybody else was selling off their investments as fast as they could. He did this because he was able to determine prices were low, because he didn't follow the crowds, and because he had a plan that involved having enough cash around to take advantage of such a situation. You don't need to be Warren Buffett, have $15 billion, or even follow the same strategy as he does in order to be successful with investing. But you do need a plan.
3) Derivatives are Toxic
Most people still aren't sure what a derivative is. They certainly can't tell if the fund manager running their 401K or pensions are loading up on them (many were and still are, in case you haven't figured that out). And even if they did, the sure as Hell didn't know what they were worth. Which brings me to my next point...
4) Know What You Own and Why
Stocks are shares of ownership in a business. Bonds are ownership of debt. These the two basic units of investing and everything else is just more complicated versions of these two basic units. Ask yourself what is in that mutual fund or index fund that you own. Then ask yourself why you own it. I couldn't tell you how many people have told me "I was invested in all blue chips." But nobody was able to tell me why. Safety? How delusional...
5) Don't Trust the Media
Most financial news is about as useful as hitting yourself with a hammer. Very, very few people predicted what was going to occur in 2008 until it was happening. Fewer offered useful advise about what to do when it happened. Even fewer predicted the rebound the stock market has a seen since then. Listening to the predictions now is like watching headless chickens. Nobody seems to know which way we're going. If they tell you they do, take it with a grain of salt. Because they CAN'T KNOW. Go back to #1 to find out why.
6) You Must Be Financially Aware
The George Soros', Warren Buffet's, and bank CEO's came out just fine in this crisis. Its the "average Joe" that has suffered the most. Why? Is it because "wall street fat cats" are simply horrible people who derive sadistic pleasure from feeding of the weak? Not likely. Sure they are greedy, but so are you. They just ended up on the better end of the equation and the primary reason why they did so is because they were prepared and aware of what was going on.
The past is behind us and unchangeable. We have choices regarding the future. You can remain ignorant of the financial "goings on" of the world and thus subject yourself to eventual victimization of the "fat cats," or you can educate yourself, gain awareness, and prepare yourself for the various scenarios that are likely to play out in our economic future. If your new to all of this, it will seem like rocket surgery. And sometimes it's best to hire a good rocket surgeon. If that's your plan, make sure you know how to tell a good rocket surgeon from a bad one. To do that effectively you will at least have to learn the basics. Remember, everything is difficult until you learn how to do it!
If you haven't already, START LEARNING!!!
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