Stock market panics come and go, but the buying opportunities are real and lasting

Of course, this is not true for all panics. We will never forget events such as the tragedy of September 11, or September 15, 2008, when Lehman Brothers filed for bankruptcy, precipitating a rapid run of the financial system and a severe economic contraction that the country did not. hadn't known 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 so called until the depression of the 1930s). And, of course, there was the Great Depression itself.

But for each of these big panics, there are dozens of small panics that seem significant at the time, but in hindsight, it sounds like nothing more than a radar shot.

Forgotten panics

The 1998 Russian debt crisis, for example, shocked the world by defaulting on its own ruble debt. Chaotic price movements in the markets have crushed a highly leveraged hedge fund called Long-Term Capital Management, which has almost destroyed the banking system with its massive commercial liabilities. The fund was bailed out by its own lenders (thanks to heavy arms from the New York Federal Reserve), which prevented the immediate liquidation of the funds, which ended the panic.

Another panic occurred in 2011, in which fears of a double-dip recession (remember that term?) Coincided with a political freeze and a debt ceiling freeze that has leads to the very first deterioration of the credit of the American government. It seemed like a big deal at the time, and the market plunged about 17% from peak to bottom, with many bank and other cyclical stocks falling 40% or more.

There was the panic of 1907, during which the failure of a large New York financial institution led to a city-wide banking system crisis, which brought drained liquidity from the economy and caused a sharp contraction as traders could not finance their stocks and companies could not do payroll. This crisis was historic because it ultimately led to the creation of the Federal Reserve, but in fact, the panic and downturn that followed proved to be short lived. (I wrote about this fascinating situation here and here.)

And in the aforementioned panic of 1997, the rapidly growing Southeast Asian exporting countries (Asian Tigers) relied on foreign investment to finance their economic growth, but they went bankrupt when the rate hike Interest in the United States has made competition for foreign capital and a stronger dollar more difficult. exports are less competitive for these countries indexed to the dollar. The Tigers allowed money to flow freely in their countries in a timely manner. But where money can easily enter, it can also exit quickly and, in 1997, an effective bank burst occurred in these countries, resulting in painful devaluations and economic collapses. This led to a massive sale around the world, and in fact it was the last time (until Monday) that the U.S. stock market used its circuit breaker to close trade after the markets fell. .

There were even smaller fears such as the 1994 bond market debacle, the SARS epidemic in 2003, the Flash Crash in 2010 (also accompanied by the dreaded fear of a double-dip recession), the rout of oil prices fueled by OPEC (its familiar?) which led to the worst start to a year in stock market history in 2016 and, more recently, to the trade war that caused a drop of almost 20% in the S&P 500 index
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in the fourth quarter of 2018.

These mini-panics are just a small sample. There are countless examples that you can find by reading the go-go years of the 1960s, the stagflation years of the 1970s and the junk-bond years of the 1980s.

There are a number of lessons that can be learned from studying these past events, including the pattern of behavior that is so strangely similar in each of these panics, but there are two other things to remember that I will mention here:

1. Note the number of Dow points that a 7% drop was recorded in 1997.

2. Notice how little you care (or even remember) about the vast majority of these mini-panics.

550 point drop in the Dow was scary before

Referring to Dow points is usually an unnecessary exercise, but I use it to show how bad the market came from the time when a drop of 550 points was a panic that required a temporary market shutdown.

My point is that the stock market rewards long-term, patient investors. Investing is not easy, but it is simple. Holding a stake in a wide range of American companies and ignoring the inevitable ups and downs is a surefire way to succeed over time.

In a quarter of a century, a drop of 2,000 points will likely be a much more normal drop of 1% to 2%, much like a drop of 550 points today.

Stocks appreciate over time and long-term investors are rewarded.

Time heals all wounds

In three years, everyone sees this period as an excellent buying opportunity. It’s an extreme probability. I don't know if this panic will get worse, and I never know in real time if the panic will be like this once in a generation, but I know it's extremely unlikely. Almost all panics end up being mini-panics in hindsight, and they also turn out to be fabulous buying opportunities.

They are also perceived with relative indifference after a few years. Many people let their memories of fear fade over time. Events that seemed important at the time are now relatively meaningless 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 escape from temporal arbitration

I do not know if this current panic of coronavirus accelerates before disappearing, but I know that it will disappear. And at some point, when enough time goes by (often it doesn't take a lot of time), everyone agrees that it was the perfect time to buy stocks.

What creates market opportunities is that at the moment we are not all in agreement. Some consider it to be a buying opportunity, others believe that this is the perfect time to sell stocks, or that it is is careful to wait for more clarity. This disparity in interpretation explains why stocks are poorly evaluated. I have often talked about how the Sabers investment approach rests on the edge of the time horizon, and this is a perfect example of why this approach can succeed over time. Shares of large companies are sold because the earnings outlook looks poor this year, even when there is little debate about the long-term outlook for the company.

Some investors sell panic for fear, others sell more rationally 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 co-owner.

Steve Jobs from Apple
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used to tell people to go for a walk and zoom out, change your perspective and look at the big picture. Sometimes it helps to zoom out and break away from the current situation.

I don't know what will happen tomorrow or next week, or next month, or next year. But I do believe that looking back in a few years and identifying this as one of those moments when it was great to be a buyer of stocks.

John Huber is the founder of Saber Capital Management LLC, general partner and manager of an investment fund modeled on the original partnerships of Warren Buffett. He can be reached at [email protected] or on Twitter.