August 28, 2018
Dear Clients and Friends,
As we approach the ten-year anniversary of the financial crisis in the fall of 2008, we thought it would be interesting and instructive to look back at that period and our assessment at the time. The "Market Panic” commentary was written October 10, 2008, following a 20% decline in the Dow Jones over seven trading days.
The Dow closed at 8,451 that day. Today it stands at about 26,000 - triple the level of 10 years ago - and that doesn’t account for dividends. Our accounts are up significantly more than that.
Belying these numbers though is how wild a ride it was from that point, at least for the next several months. We penned that commentary on a Friday. The next trading day, a Monday, the index surged 11% to 9,388 - in one day! But two weeks later it was right back below its previous level, at 8,176. The next day it rose almost 11% (again), before falling to 7,552 on November 20, yet another low. After recovering into year-end, stocks began a steady decline in early 2009, with the Dow closing at 6,547 on March 9, 2009. This was 22.5% below the level at which it sat when we wrote the commentary. So, in effect, we had a massive correction followed by another massive correction.
There are many lessons we can take from that time. Among them:
1. Despite the fact that on October 10 the pain was far from over, those who didn’t panic and stayed invested were rewarded over the long-term, which is how it has always worked throughout history. Those that sold in October 2008 may have felt rewarded in March 2009, but when did they go back into stocks, if at all?
2. Not knowing where the bottom was didn’t prevent one from making money. The wild swings in the market during that time were completely unpredictable, as was the market’s general direction over those months. We had no idea where the bottom was, and neither did anyone else. We certainly would not have expected it to fall another 22% from the time of our commentary, but it did. But we didn’t need to know where the bottom was in order to make a beneficial long-term decision.
3. It paid to be aggressive when everyone was scared. Rather than making our portfolios more defensive, as many managers were doing at the time, we made them incrementally less defensive, believing that the greater opportunities were in the more cyclical sectors of the market. In retrospect, perhaps we should have been even more aggressive. But we’re human, and like everyone else, we were scared – more than at any other time in our careers.
4. The system survived, as it always has, and stocks eventually reached new highs. Someday the world may indeed end, but making investment decisions on that premise has never been fruitful.
Through that difficult time, our core investment principles, which have been in place since the firm’s founding, helped guide us. We stayed fully invested, kept our focus on the long-term merits of an investment rather than short-term factors, and concentrated in our best ideas.
If the time to be aggressive is when conditions and sentiment are poor, then of course the time to be more circumspect is when they are good, as they are now. With valuations high, the economy strong, and investors confident, we have gradually reduced risk in our portfolios. We know there will be another market correction; we just don’t know when it will be. When it does occur, we expect our portfolios to suffer losses, despite our efforts to manage this risk. And we will once again adhere to our principles, which we believe will allow us to take advantage of the market disruption for the long-term betterment of our portfolios.
Mark Oelschlager, CFA
Co-Chief Investment Officer & Portfolio Manager
The investments mentioned or listed in this article may or may not represent an investment currently recommended or owned by Oak Associates for itself, its associated persons or on behalf of clients in the firm’s strategies as of the date shown above. The investments mentioned do not necessarily represent all the investments purchased, sold or recommended to advisory clients during the previous twelve month period. Portfolios in other Oak Associates strategies may hold the same or different investments than those listed or mentioned. This is generally due to varying investment strategies, client imposed restrictions, mandates, substitutions, liquidity requirements and/or legacy holdings, among other things. The particular investments mentioned were not selected for inclusion in this report on the basis of performance. A reader should not assume that investment(s) identified have been or will be profitable in the future.