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Last Updated : Sep 18, 2018 05:52 PM IST | Source: Moneycontrol.com

Lessons from 2008 financial meltdown: A smart investment strategy is to buy on bad news

The important lesson from the crash and the later rebound is ‘buy on bad news’, says VK Vijayakumar of Geojit Financial Services

Moneycontrol News @moneycontrolcom

V K Vijayakumar
Geojit Financial Services

Nassim Nicholas Taleb in his famous book ‘The Black Swan: Impact of the Highly Improbable’ explains the consequences of rare and unpredictable events. The financial meltdown of 2008 was a black swan that unleashed profound consequences.

It was 10 years ago, on September 15, 2008, that the iconic US investment bank Lehman Brothers went bankrupt. The Lehman bankruptcy triggered a financial contagion culminating in a financial meltdown, pushing the global economy into recession.

Global stock and currency markets crashed. Credit contracted hugely and business confidence was impacted. Global GDP contracted 2 percent in 2009. The US economy contracted 5 percent, with 10 million jobs lost.

Europe was severely impacted by the 4 percent contraction of its economy. Southern Europe particularly Portugal, Ireland, Italy, Greece, and Spain were severely affected, pushing Europe into a debt crisis by 2010.

International trade contracted 13 percent in 2009. Asia was one of the least affected regions. China and India were least impacted even though both countries experienced a decline in growth rates.

The crash in the US stock market was one of the worst in history. The crash in the Dow on September 29, 2008 by 778 points was the worst point drop in its history until then. The crash in global stock markets ranged between 40 percent and 75 percent.

Globally, stock markets lost $37 trillion in market value. Many stock markets - Russia, Ukraine, Iceland, Indonesia, Pakistan - were shut and trading suspended for days. In India, the Sensex crashed 60 percent from its peak. Foreign institutional investors (FIIs) sold and exited resulting in capital outflows of $12. 8 billion. The rupee depreciated 25 percent against the dollar.

The crisis led to synchronised global economic initiatives to limit the damage and revive the economy from the crisis. The US Federal Reserve, the European Central Bank and the central banks of UK and Japan implemented an ultra-loose monetary policy and brought down interest rates to near zero levels.

The Federal funds rate was brought down from 5.25 percent in August 2007 to 0.25 percent and it remained there till December 2015. Even now it is at 2 percent. Keynesian fiscal stimulus programmes were also implemented.

Now the global economy is back to its high growth trajectory, with global GDP growing 3.6 percent in 2017. The $19 trillion giant US economy is firing on all cylinders. Europe, after overcoming the debt crisis, is back to respectable growth.

China, avoiding a crash landing of the economy, is cruising at a moderate growth rate of 6.7 percent. India, overcoming the twin shocks of demonetisation and implementation of the Goods & Services Tax, is back to the high growth rate, currency woes notwithstanding.

Globally, the stock markets have rebounded smartly from the crash and most markets are now at fresh highs. The S&P 500 has more than quadrupled from the low of 666 recorded on March 2008 to around 2,700 at present. The Sensex, too, has more than quadrupled from the March 2009 low of 8,160 to above 37,000 at present.

The lesson from the crash: history repeats

The important lesson from the crash and the later rebound is ‘buy on bad news’.

The market tends to overreact and this over-reaction provides buying opportunities. Take a look at the crashes and rebounds in the Indian stock market during the last 25 years.

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All major corrections were great buying opportunities. Investors who bought 'when there was blood on the streets' laughed all the way to the bank when calm returned to the market. Of course, it is difficult to catch the bottom of the market.

It is enough to buy when the market stabilises following the crash and wait with a lot of patience. As Thomas Phelps said, "To make money in stocks you should have the vision to see, the courage to buy and the patience to hold.”

Disclaimer: The author is a Chief Investment Strategist, Geojit Financial Services. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Sep 16, 2018 12:36 pm
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