Do you remember where you were on October 27th, 1997?
Probably not. I don’t either. But on that day, the Dow plunged 550 points, which was roughly the same amount in percentage terms (7%) as today’s 2,000 point drop. In the late 1990’s, the Asian financial crisis was the reason for that panic. But like many panics, as time passes, they seem to be much less meaningful in the rear view mirror.
Of course, this isn’t true for all panics. We will never forget events such as the 9/11 tragedy, or September 15th, 2008 when Lehman Brothers filed for bankruptcy, precipitating a swift run on the financial system and a severe economic contraction that the country hadn’t seen since the Great Depression. There was the Panic of 1893 which led to a depression that was arguably as severe as the Great Depression (and in fact was called just that until the Depression of the 1930’s arrived). And of course there was the Great Depression itself.
But for each of these Great Panics, there are scores of smaller panics that seem very significant at the time, but in hindsight look like nothing more than a blip on the radar.
The Forgotten “Panics“
Examples of such “mini-panics” that felt like full-blown panics at the time include the 1998 Russian debt crisis where Moscow shocked the world by defaulting on their own ruble debt. The chaotic price movements in the markets crushed a hugely leveraged hedge fund called Long-Term Capital, which nearly down the banking system with its massive trading liabilities. The fund was bailed out by its own lenders (thanks to some strong-arming by the NY Fed) and this prevented the fund’s immediate liquidation, which stopped the panic.
Another panic occurred in 2011 where fears of a “double-dip” recession (remember that term?) coincided with political gridlock and a debt ceiling standoff that led to the first ever downgrade of the credit of the United States Government. This seemed like a big deal at the time, and the market plunged roughly 17% from peak to trough, with many bank stocks and other cyclicals down 40% or more.
There was the Panic of 1907, where the failure of a major New York financial institution led to a city-wide run on the banking system, which drained liquidity from the economy and caused a sharp contraction as merchants couldn’t fund their inventory and corporations couldn’t make payroll. This crisis was historic because it eventually led to the creation of the Federal Reserve, but in fact the panic and subsequent downturn turned out to be very short-lived (I’ve written about this fascinating situation here and here).
And in the aforementioned 1997 panic, fast growing Southeast Asian export nations (“Asian Tigers”) relied on foreign investment to finance their economic growth, but they went bust when rising US interest rates made it harder to compete for foreign capital and a stronger dollar made exports less competitive for these dollar-pegged nations. The Tigers allowed money to freely flow into their countries in good times. But where money can easily enter, it can also quickly exit, and in 1997 an effective run-on-the-bank occurred in these nations, resulting in painful devaluations and economic collapses. This led to a major selloff across the world, and in fact was the last time (until today) that the US stock market used its “circuit breaker” to shut down trading after markets plummeted.
There were even smaller scares such as the bond market debacle of 1994, the SARS outbreak in 2003, the “Flash Crash” in 2010 (also accompanied by the dreaded double-dip recession fear), the OPEC-fueled oil price rout (sound familiar?) that led to the worst start to the year in stock market history in 2016, and most recently, the trade war that caused a peak to trough drawdown of nearly 20% in the S&P 500 in the 4th quarter of 2018.
These mini-panics are only a small sample. There are countless examples that you can find when reading about the Go-Go years of the 1960’s, the stagflation years of the 1970’s, and the junk bond years of the 1980’s.
There are a number of lessons that can be learned by studying these past events, including the pattern of behavior that is so eerily similar in each of these panics, but there are two other takeaways I’ll mention here:
- Notice the number of Dow points that a 7% drop was in 1997
- Notice how little you care about (or even remember) the vast majority of these mini-panics
550 points used to be scary
Referencing Dow points is usually a useless exercise, but I use it to show how far the market has come from the days when a 550 point decline was a panic that required a temporary closure of the market.
My point is the stock market rewards investors who are long-term oriented and patient. Investing isn’t easy, but it is simple. Owning a stake in a broad swath of American companies and ignoring the inevitable ups and downs is a sure-fire way to achieve success over time.
A quarter century from now, a 2000 point decline will likely be a much more normal ~1-2% drop, just like a 550 point drop is today.
Stocks appreciate over time, and long-term investors get rewarded.
Time Heals All Wounds
Three years from now we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics wind up being “mini-panics” in hindsight, and they also turn out to be fabulous buying opportunities.
They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.
But they all seemed scary at the time.
And they were all great opportunities to buy stocks.
The Time Arbitrage Loophole
I don’t know if this current coronavirus panic accelerates before it subsides, but I do know it will subside. And at some point when enough time passes (often not much time is required), we’ll all agree that this was a great time to buy stocks.
What creates opportunity in markets is that in the current moment, we don’t all agree. Some view this is a buying opportunity, others think it’s a great time to sell stocks, or that it’s prudent to wait for “more clarity”. This disparity of interpretation is why stocks get mispriced. I’ve talked often about how Saber’s investment approach relies on time horizon edge, and this is a perfect example of why this approach can be successful over time. Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects for the business.
Some investors are in fact panic selling out of fear, others are more rationally selling because they don’t want to own a business that will have a bad year. And this creates opportunities for those who want to buy a stake in companies as a long-term part-owner.
Steve Jobs used to tell people to go for a walk and “zoom out”, to change your perspective and to look at the big picture. Sometimes it helps to zoom out and detach yourself from the current situation.
I don’t know what happens tomorrow or next week, or next month, or next year. But I am confident that we’ll look back in a few years and identify this as one of those times where it was great to be a buyer of stocks.
John Huber is the founder of Saber Capital Management, LLC. Saber is the general partner and manager of an investment fund modeled after the original Buffett partnerships. Saber’s strategy is to make very carefully selected investments in undervalued stocks of great businesses.
John can be reached at john@sabercapitalmgt.com.