Dan Williams, CFA, CFP, Investment Analyst
Just over 10 years ago on September 15, 2008, Lehman Brothers filed for bankruptcy shocking the global financial markets. In retrospect, the collapse trajectory was there for all to see with the shock being more attributed to people’s reliance on things staying the same than any new data. This clinging to the past was so strong that a postmortem analysis showed that Lehman Brothers employees, the very people who were the insiders to see the company’s problems, were shown to have kept buying stock. Many believed, both insiders and the public, that the stock was a compelling value as they anchored their valuation toward the stock high of $86.18 in February 2007. When the end finally did come for Lehman it was a long time coming based on the data stream but felt abrupt based on our ability to process the new reality. When a character in Ernest Hemingway’s novel “The Sun Also Rises” was asked how he went bankrupt he said, “Two ways, gradually and then suddenly.”
Not all individual stock downturns lead to a rapid collapse or even a permanent lower price range. Still, this anchoring to past prices is prevalent enough for investors to frequently be told to fear “value traps.” A value trap is a stock which looks cheap based on previous stock prices, but an analysis of future prospects show that the underlying stock’s fortunes have significantly and potentially permanently changed for the worse.
The fact that companies’ future prospects are always changing is a sign of a dynamic economy that through creative destruction increasingly improves the products for the consumers of an economy. Much has been made of the disruptive Amazon effect that through making the purchasing of products easier as the one-stop shop for online shopping has crushed traditional brick and mortar businesses and other smaller online retailers. It is bad for those businesses left behind but the consumers win.
This lesson of unreasonably expecting things to remain the same holds meaning outside of just the financial markets. In George Friedman’s 2009 book “The Next 100 Years” he opens by taking a quick survey of the way of things at 20-year intervals starting at 1900. He notes that in 1900, London was the capital of the world and Europe was at peace with great prosperity, in 1920 Europe was torn apart by an agonizing war, in 1940 Germany had reemerged to dominate Europe, in 1960 Germany was crushed and the United States and the Soviet Union were the superpowers, in 1980 the United States had been defeated in war by tiny communist nation North Vietnam showing communism was on the rise, and finally in 2000 the Soviet Union had collapsed with a United States hegemony being the state of the world. If I would take license to write his 2020 view, it would talk of the global uneasiness of a China on the rise to legitimately challenge the United States as an economic and political power.
What is clear is that things change and failing to try to at least look around the next corner is akin to walking backward. Just because you have not walked into a wall yet is a poor reason to expect an unending clear path. Our role as the investors of capital attributes special importance to forward thinking but it is a lesson for all to learn.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.