There is definitely a lot to learn from the 2008 market crunch. But among all the things we should note in our little black book of investing experiences, we should take a page to highlight the psychotic aspect of investors during a Bear Market. Once the panic button has been pushed, everybody runs like chicken with their heads cut off!
Driven by fear, even the traders sold their positions. They knew that if they lost too much, they wouldn’t have to bother waking up early to come into the office the next morning.
What is happening and why it is happening?
If we take a closer look at the 2008 market “incident”, we see that everything started with the Lehman Brothers’ failure. Trust in banks, brokerage firms and all types of financial institutions was demolished. Once investors have been betrayed (i.e. by a bankruptcy), it is hard to not put all the eggs (good or bad) into the same basket. “banks are all the same” most people said. They were expecting to see all banks seek bankruptcy protection and to see the death of capitalism as we knew it.
This is what I am talking about, THE psychotic aspect of investors ;-). There is nothing that dies faster (besides a fly on your plate at a BBQ 😉 ). Most investors were selling banks when it was the perfect time to buy them.
However, as was the case during the tech bubble, you need to be able to make the right stock picks. There are still several banks having financial problems in the States (and I am not even considering the UK….). However, it doesn’t mean that because an industry is severely affected that cancer has infected the entire body.
Investors had plenty occasions to see that Canadian Banks were not in the same boat.
#1 They declared profits in 2008.
#2 The Bank of Canada didn’t provide much help (some measures were applied but it was minute compared to what happened Globally).
#3 Investors could have looked at how banks in other countries are managed and they would have realized that Canadians banks couldn’t take such risks according to Canadians law. They also benefitted from an Oligopolistic environment and Government protectionism.
#4 All Canadians banks were fully capitalized and didn’t lack cash. Some of them even issued additional preferred shares to further strengthen their balance sheets and financial ratios but not as a requirement for survival.
#5 Even during the first quarter of 2009, they showed very interesting profits and still their stocks were still undervalued.
Back in 2000, tech stocks, as a category, almost disappeared from the stock market because most of them were walking on thin air. They were selling an idea without a product. They were selling a concept without income. And the worst part, they were issuing shares without mentioning profit forecasts. This is why it crumbled; because this value never existed. However, some techs were strong and well built. Those who survived the crisis did so because they were built and managed differently. Those stocks have risen since then.
This very same phenomenon has happened with banks and other financial institutions. Following this assumption, an interesting buy right now would be Canadian insurance companies as they haven’t come back as strong as banks in term of stock price… What do you think?
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