This week marks the fifth anniversary of the very bottom of the stock market crash. In early March, 2009, the TSX Index hit 7,480, a drop of just over 50% from the highs of only nine months earlier. Stock market investors were battered and stunned. No one knew if worse was to come, and there was no shortage of doomsayers, predicting the end of the financial world. I well remember one client calling to tell me that her friends were warning her that the stock market was “going to zero”. Even today, after five years of gains, we regularly meet with investors who are still suffering what we call “post traumatic economic stress disorder”.
The 2008/09 crash made us all think about risk. With the perspective of five years, it is useful to look at real outcomes after the worst market fall in eighty years. What did investors lose? How bad were the consequences of this once in a lifetime (we hope!) or certainly once in a generation event? As it turns out, not that bad.
|Total Holding Period Return if Bought on August 31, 2008 (including dividends)||As of March 6,
|As of December 31, 2009||As of December 31, 2010||As of December 31, 2011||As of December 31, 2012||As of December 31, 2013|
Imagine that you had purchased the ten blue chip Canadian stocks shown in the chart above on the last day of August, 2008, just before the crash began. Certainly it would have been one of the worst days to buy stocks in the history of the Canadian market. This mini-portfolio is exposed to seven different sectors and contains only high quality dividend paying companies. Nonetheless, by March 6, 2009, at the bottom of the market, these stocks had lost, on average, 24.8%. It is no wonder that investors became disheartened with results like that. Those who sold at or around that date locked in horrible returns.
However, for those who did not sell, the results were very different. By Dec. 31, 2009 the return on this portfolio was zero. The recovery was almost as swift as the drop. Investors who bought on the worst possible day made no money over a sixteen month period, but they didn’t lose any money. They did lose time and opportunity, but not very much of either. Had an investor put money into a no risk money market or other interest bearing investment on August 31, 2008 instead of buying stocks, the return to Dec. 31, 2009 would have been about 3%. That was the opportunity cost of the crash to investors in high quality stocks, provided that they did not sell out.
What happened after 2009 is perhaps even more important. This portfolio gained each year, and by the end of 2013, 5 ¼ years after the start of the crash, was up by 71.5%. That is a compounded rate of return of 10.8% per year, from inception on the worst investing day in history.
It seems to me that the experience of the crash and the years that have followed it has a number of important lessons for investors. I would summarize them as follows:
- Good companies hold their value. Their market price may fluctuate as happened in the crash, but over time the market will always recognize the true worth of quality stocks. In the meantime, dividends are paid and probably in increasing amounts over time.
- Attempting to time the market is futile at best and very expensive at worst. The investor who got out of the market on August 31, 2008 missed the crash and made 3% over the next sixteen months, but most probably did not reinvest on March 6, 2009. In fact, probably that investor missed out on most of the gains subsequent to the bottom. The investors who sold on March 6, 2009 probably never got back into the market at all, having decided that the stock market was too risky and dangerous. Neither of those investors did nearly as well as the investor who simply did nothing at all. Market timing requires two very well timed decisions; few if any can achieve that level of precision.
- Volatility is not the same as risk. Almost all of these ten companies showed volatile price behavior, yet all of them continued to make money and pay dividends through the worst of the crash. None was ever remotely at risk of going out of business. There was never any risk that one of these companies would become worthless. The real risk of permanent investment loss was very small for the long term investor.
- No one knows when the next crash will come. No one knows when the next bull market will start or end. No one has to know those things to be a successful investor. Buying high quality companies, collecting increasing dividends and waiting for the stock market to recognize value is all we really need to know how to do.
Five years after the bottom of the crash the S&P 500 and the Dow Jones Industrials are setting new highs. There is no shortage of articles touting the possibility of another crash. Armed with the lessons set out above, we can safely ignore them.