YOU DON’T READ ABOUT MARKET CRASHES

I had just finished a graduate diploma in applied finance and investments. With distinctions in a few subjects. I was feeling confident too. I had just got the job as an analyst by writing to the CEOs of leading research houses and investment consulting firms. Ok, perhaps, bordering on over-confident. I was 23.

When I got the chance to go along to a research meeting with one of Australia’s leading fund managers, I was very excited. At the meeting, my boss introduced me as a young, bright analyst. The fund manager smiled and asked what I had studied. I told him about the course I had just completed. He then asked what I knew about the 1987 stock market crash. I told him I had read about it during the course.

“You don’t read about market crashes, young lady, you live through them,” he said in a matter-of-fact tone. It put me where I belonged. I kept my mouth shut for the rest of the meeting.

I didn’t feel offended at all. I just decided to continue as support analyst for main asset classes, and focused my efforts on structured products and new asset classes that the lead analysts didn’t want.

I happened to be on holidays in Hong Kong in 1997, when I noticed our cab driver seemed to be in a bad mood. When we got back to the hotel in the evening, we saw the news about the markets collapsing. It was the start of the Asian crisis. I was finally witnessing my first real crash. Common people gathered around TV screens with ticker tapes. Many of them with looks of despair on their faces. Some holding their heads in their hands.

I got back from my trip to find all my recommendations had done ok. No catastrophes. I had finally lived through a crash.

Life went on. I decided to study some more. I completed the CFA in 1999. The global markets were in a bull run. Our little research firm had grown well. I took on the responsibility of taking our industry offering online.

The firm decided to venture into investor education. It raised funding as a media/education firm from employees, clients etc. I was ready to try my hand at investing real money. Along with other colleagues, and my brother, I bought a small stake in the company. An accountant friend wasn’t too happy about the dot com valuations, but I felt I was a trained analyst, and I knew how well the firm was doing. He also ended up buying shares of his employer, a small listed company providing vocational education using satellite boxes.

Of course, we knew it was a bubble. We told our clients to reduce equity holdings, not sway from the value bias, certainly stay away from TMT (technology, media and telecom) funds.

Bubbles burst. So did that one. Spectacularly. My friend was not able to get out of his holdings. I thought I was fine…after all, my stake was in an unlisted company. I fooled myself for many years to come. As it turned though, we never ever saw any of the capital invested from either of our investments. Our first real crash!

Life went on. My friend joined my firm to help us researching agricultural tax schemes. His job was to select only one or two out of the plethora of timber, vineyards and fruit orchard projects offered at the end of each financial year. He produced great research. Along with our clients, my family and I were convinced to invest in the schemes he had shortlisted. Since we were in the highest tax bracket, we borrowed to maximize the tax incentives.

It went well for a while. I doubled my capital within 12 months on my first investment. I took profits and invested in another. But then things started going wrong. Things that hadn’t happened in 30 years, like droughts and hailstorms. (Of course, I now realise 30 years is not even a blip in nature). Long story short – my savings got wiped out a second time.

That’s when I remembered those words….you don’t read about crashes, you live through them.

The message finally started sinking in. I was starting to learn some lessons, such as –

• More than numbers, it’s really useful to read about financial market history.
• The other subject that comes in handy is psychology. Behavioural finance is at the crossroads of psychology and finance.
• However, no amount of reading had prepared me for the emotions that I felt through the booms and busts. Everyone views events around them differently, depending on the values/beliefs and experiences they’ve had. (This is why I find it ludicrous when risk profiling questionnaires ask ‘what would you do if your portfolio drops 30%?’ The fact is that people won’t know unless they’ve experienced it. So a better question might be ‘What did you do the last time your portfolio dropped 30%?’)
• Even trained and experienced analysts suffer from not only the raw emotions of greed and fear and the now well-known behavioural biases, but also sheer egoism and stupidity.
• Markets swing too far on each side.
• You need to segment your wealth/assets into different risk/time buckets. The financial services industry calls it ‘asset allocation’ based on your ‘risk profile’. But frankly, I hadn’t seen anyone of my industry colleagues putting all of their wealth in an asset allocation suggested by an efficient frontier based on a risk profile spit out by answering some questions.

Apart from the financial lessons, these market crashes tested personal relationships. I will share these another time.

Anyhow, life went on. (It always does, by the way). By the time the 2006/07 boom came around, I had started to recognize what euphoria looks like. When the Lehman crisis started to unfold, I was on holiday again. I decided to extend my holiday to stay away from the industry and just watch normal people in cafes in Paris. When I got back, I coolly started to look around for opportunities.

I eventually invested in real estate in 2008 when I thought there was ‘blood in the street’. As we all now know, there was much worse to come.

I have now become a voracious reader. As I read more and more books, I can’t help but remember that one line twenty years later. I am just sharing it hoping it might help some other young fresher.