Brainy's

10 Key Lessons
from the financial crisis
for investors and traders

 
There are many lessons to be learnt from the GFC (Global Financial Crisis) of 2008+,
or in fact from any financial crisis that hits the markets periodically.
And some lessons are very pertinent for investors and traders.

Here is the list of Brainy's 10 Key Lessons from the Financial Crisis
for the benefit of investors and traders.

We could also call this: "Sensible Investing in a new age"
 
You are here: Brainy's Share Market Toolbox > Ten Key Lessons
Related information: Sensible Investing; Contrarian Investing Redefined; Funda-Technical AnalysisTruth about Blue Chips;
 Robert's Philosophy; Share Market GEMs; Share-Market-Ready;

Introduction

A lot of people were suffering from the economic downturn in 2008-2009 - the so-called Global Financial Crisis (GFC). Perhaps an understatement for some people. And many people continued to suffer for some time afterwards. For many, their pending retirement was put on hold as they returned to the work force.

But it is important to remember that even though the share market bears that demolished share prices might hibernate for a while, those bears are not far away. They can potentially return with very little warning and put another huge hole in our investments.

It is very important to Beware the Share Market Bears! If you know the warning signs, then you can guard against the potentially significant impact when the share market bears do strike again.

But what are the warning signs? There are clues in the ten lessons outlined below.

The first version of these notes were prepared in early 2009, delivered as a public presentation, renamed "Beware the Bears!", and massaged and revised into the current form.

The material is also available in the presentation slides from a public presentation, and will soon be available in an updated booklet format. See the details at right.

In spite of the GFC!...

... a lot of people saw this financial crisis coming, 
and a lot of people lost only a little,
or maybe nothing at all!!

But ... how did they know?

Take heed of the Ten Key Lessons below, and all is revealed.

May I wish you the best of luck
with your investing / trading.

Robert Brain 

More information and downloads

The latest presentation slides from the public delivery of presentations on this topic are available from Robert's: Presentation Slides web page


Premium Toolbox Members can download the previous set of hand-out notes from the Premium Section of the Share Market Toolbox here.
(The handout notes are currently being rewritten inline with the updated material on this web page below.) Download the last handout here...
(about 2MB - a fairly big file which might take a few minutes to download - it will prompt for Premium Toolbox username and password).

If you want to stay informed of updates to these notes, or anything else to do with the share market,
simply register your interest here...
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Quick Links

The research for this led to a detailed analysis of two decades of Australian Bull and Bear Markets.

Robert publishes:


Free downloads:

Robert's "The Traders Creed"
single page poster.

Robert's stock market "Gems".


Other

The Melbourne
BullCharts software User Group -
meets monthly in Oakleigh for free.

The official BullCharts software web site.

Why does Robert choose to use BullCharts charting and trading software?

And don't forget,
the share market is like an elephant.

10 Key Lessons for Investors and Traders

This could also be called: Beware the Share Market Bears! 

A brief summary of why we should beware the bears
("The 10 Key Lessons for Investors and Traders")

Lesson #1 - The buy-and-hold strategy has expired!

Investments can fall as much as 90% or more! There is a long list of examples of companies that plunged in value by 70%, 80%, and even 90%. And some of them went under in the big GFC with 100% of their value gone.

Blue chip stocks can disappoint. In any of the periodic financial crises that come along from time to time (perhaps as frequently as every 4 years in the good times), it might even be worth divesting of blue chip stocks to preserve capital.

Lesson: The buy-and-hold strategy has expired!

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Lesson #2 - Priority one - Preserve the capital!

Blue chip stocks are not safe havens and may not maintain their capital value. Capital-protected products exist, but their effectiveness can be questionable - be sure to read the fine print and understand the costs of the capital-protection guarantee. Keeping a falling investment just to receive the dividend income stream might not be as good as liquidating the asset and redirecting the capital to another investment.

For share market investments, consider using a Stop Loss approach to preserve capital, and prevent it's deterioration.

Lesson: Priority one - Preserve the capital! Consider selling a falling investment in order to protect the investment capital.

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Lesson #3 - The Big Picture - maintain the perspective

Don't get hung-up by the short-term news and noise in the markets - it is very distracting.
Remember, the market is like an elephant. Step back and look at the bigger picture, but beware of the people who tell us that our stock market investments will make returns in the long-term (they are referring to the very long term - 30, 40 years or more). 

Also beware of the arbitrary baseline dates that are used to measure and report on performance (eg. year-to-date, or this quarter). These can be very misleading. Step back and look at more realistic scenarios and time frames (eg. from market peaks, and troughs).

Lesson: Remember the big picture to maintain perspective.

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Lesson #4 - Markets, stocks, property all run in cycles

A number of different cycles are reputed to exist, including:

The challenge for all of us is to be aware of these cycles, and to anticipate them so that we don't get caught up in them.
See more details about investing in cyclical stocks.

Lesson: It can be very useful to be aware of the cycles, and of over-the-top prices.

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Lesson #5 - Stock market corrections - they happen more often than we care.

Markets rise over time (over the very long term) - this cannot be disputed. One web-based sample is the Vanguard chart of the performance of a $10,000 investment over time (see it here). We can see charts of the US market going back many decades, but for the Australian market only since 1980 (as we had state-based stock exchanges for decades prior to that).

Analysis of the bear markets (more than 20% fall) and corrections (more than 10% fall) on the Australian market shows that they occur about every 3 to 4 years. So the next one is not far away. And on two occasions, a bear market has seen a market correction occur within 3 years, and before new market highs are reached.

The research for this led to a detailed analysis of Australian Bull and Bear Markets over two decades.

Lesson: Stock market corrections do happen, too often than we would like, and the bears can demolish investments, so be prepared to protect them (the investments, not the bears).

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Lesson #6 - We can "time the market"!

Despite what many finance industry professionals say, we can "time the market". It is possible.

"Timing the market" refers to the situation where we carefully time our entry into the market, and we time our exit from the market. We do this in an attempt to maximise profits and minimise losses. The alternate view is to "spend time in the market"; but see Lesson #1 and more for comments on this.

Some experts convincingly say that it is not possible to "time the market". They say that if you try to time the market, and if you miss out on some of the "best" days in the market, then your returns are limited. What they don't tell you is that it really is possible to avoid the "worst" days in the market, and to avoid significant losses. In this way you can potentially have much better returns.

Frank Watkins (in Perth, Western Australia) sums it up nicely in his book "Exploding the Myths". And other famous traders / authors reiterate the same stories.

Lesson: Many people do successfully "time the market" - it can be done!.

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Lesson #7 - Financial advisors, brokers, bankers.

Don't forget that the finance industry professionals provide advice because it is their job. And if the advice is not sound, it won't affect their take-home pay, nor their own investments. When it comes to financial advice, your own financial advisor might not be 100% right, 100% of the time. Sometimes a second opinion can be useful.
See a short list of useful questions to ask your financial adviser.

Lesson: Don't believe absolutely everything that you hear. Healthy scepticism is, well, healthy.

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Lesson #8 - Leverage - beware!

Margin lending can be safe over the long term under some circumstances (such as in bull market conditions); but it can quickly destroy wealth in bear market conditions. Investment products such as CFDs (Contracts for Difference), and other geared products can do likewise.

Some people take out a margin loan, and borrow funds to the max so that they can highly leverage their available capital. Some people use the borrowed funds to buy an investment (like shares) for the long term. And then they park the investment and forget about it. And they might pre-pay a year's worth of interest expense to gain a tax advantage.

Lesson: Leverage - Beware! It might work in a raging bull market. If you don't understand the rules of the leverage game, then don't play the game.

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Lesson #9 - Chart reading can be very useful.

It is possible to anticipate bear market conditions, and then to pro-actively take action to protect investment capital. Share market price charts contain a wealth of information about the underlying mood of investors and traders in the markets. Consider using charts and technical analysis tools like:

See more details on this topic according to Brainy's Weekly Market Analysis, and more details on technical analysis.

Lesson: Charts and technical analysis can be very useful.

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Lesson #10 - Risk/Reward - Understand and respect it

By understanding the key notions of risk and reward, we are able to sleep more easily at night. Ideas such as "the amount at risk" and The 2% Rule, and limiting the amount of a portfolio that is exposed to given investments, or given sectors or asset classes.

Optimising the position size can be very useful. Calculating in advance the amount to be put "at risk" for a given amount of likely "reward" enables us to calculate the Reward to Risk Ratio, and strive for a value much greater than 2.

Lesson: Risk/Reward - Understand and respect it.

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Conclusion

The conclusions from  this material is that it can be fruitful to be on the ball, to be somewhat aware of the state of health of the overall market, and to practise the Funda-Technical Analysis approach.
 
And beware
the sharks
in the ocean!



The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.


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Copyright 2008-2012, R.B.Brain - Consulting (ABN: 52 791 744 975).
Last revised: 13 October, 2012.