It's hard to believe that it was five years ago that the U.S. financial crisis officially started. While economists can now state that the Great Recession officially kicked off before then, it was on Sept. 15, 2008, that public learned how bad things really were. Five years ago a century-old investment bank, a bedrock of the American financial markets, went under. It was the beginning of end for Lehman Brothers.
Although stocks had already been selling off before Lehman's collapse, from the day Lehman collapsed to March 2009 when the S&P 500 reached its low, the S&P 500 dropped by more than 40%. The month after Lehman, the S&P 500 fell by more than 20%. Remembering all these facts makes its hard to believe that it's been half a decade since the U.S. economy faced a catastrophe that rivaled 1930.
But here we are five years later and the lessons for investors are as simple as they were before. It's easy to look back now with the S&P 500 higher than it was pre-Lehman and underestimate how bad things really were. The human psyche is wired to respond that way once good times are replaced by bad. The psyche also overestimates when things are bad, especially when it comes to the stock market. I'm reminded of this when I go back and observe how far equity prices fell. And I'm not merely talking about the fact that the S&P fell by more than 50%, but what Mr. Market was doing to individual businesses.
In March 2009, Ruth's Hospitality Group (RUTH), the operator of Ruth's Chris Steak House and other steakhouse concepts, was trading for $0.75 a share. That was a valuation of around $26 million, and what you got for that was 150 restaurants, around 80 of which were company-owned. Basically, you were getting one company-owned restaurant and royalties from another franchised restaurant for around $250,000 (including debt). Each of those restaurants was doing around $4 million a year in sales. Assuming a franchise fee of 5% of sales, for each $250,000 you were getting $4 million in sales plus royalties (most of which is profit) of around $200,000. Five years ago, I'm sure it was easy to think that people would completely stop eating out at restaurants, but that again is the human psyche at work.
Clearly, paying a bargain price for assets is the most effective form of protection in any market environment.
Another crucial lesson is that this time is not different. Market bottoms and tops may have different degrees of severity and different sparks that cause the fire. But human behavior doesn't change. The market is abandoned when things are in turmoil, thus situations like Ruth's exist. When the market is pleasant, everyone talks about how wonderful it is.
Never assume that the future has to be like the past. I doubt the next five years will produce another 100% gain in the overall stock market. Right now, I can find assets that are as ridiculously priced as five years ago. Odds are that in the next five years, Mr. Market will hiccup again (probably not as severe as 2008) but when he does, try to behave in contrast with what you think you ought to do.