Weekly Observations for 3/16/2018 — Bear Stearns Bailout

Today is the 10 year anniversary of the bailout of Bear Stearns at the height of the 2008 financial crisis — to be followed by Lehman Brothers, Merril Lynch, and other failures/bailouts later that year. Here is a full timeline of the crisis. Our memories are short, and my colleague, Tommy Thornton, reminded me today in his daily letter that the financial sector has yet to regain the prices investors were paying at the height of the bubble in 2007.

The chart below graphs the Financial Sector price at the 2007 peak to today’s price — still below the peak after 10 years.

It’s a similar story for the housing bubble, which reached its peak about two years before the mortgage-induced financial bubble. The Housing Index took 12 years to regain those peak prices just this past September.

And five years before the housing bubble, the technology bubble reached its peak price in March of 2000. The Nasdaq (QQQ) just broke even in January of last year — yes, it took almost 17 years to recover from the peak of the tech bubble.

There are other recent examples of excessive asset prices that proved to be unsustainable, such as the commodities index at $76 in July 2008; today at $16 and down 79% over a 10 year period. Or Bitcoin at nearly $20,000 in December; today at $8,500. Down 57% in a few months.

My reason for the walk down memory lane in this week’s observations is to remind us that the price we pay for an asset matters. Speculators who buy assets near peak prices, when everyone is buying and it feels good, will find it challenging to achieve long-term returns commensurate with their financial goals. As investors, it is our job to identify assets at prices where we can reasonably expect a return on and of our capital — and sometimes (not always) that means tacking against the crowd in order to best protect, preserve, and build wealth.

Thoughtfully,
Kenneth