Crisis Behavior: Lessons Learned
For over 30 years, nearly every business day, I sat at my Merrill Lynch financial advisory desk serving our clients. I was there for them in good times and bad – especially the bad. That’s when people need their financial advisors the most.
For a large majority of my career, times were good. In retrospect, my timing looks impeccable. When I was hired by Merrill Lynch in 1983, the Dow Jones Index traded at 1200. The year I retired, 2017, the same index traded at 25,000. Not bad at all.
Because the Dow Jones Index tracks a diversified mix of 30 of America’s largest and most stable companies, otherwise known as ‘Blue Chips,’ it is a good indicator of the health of the U.S. and global economies.
Can you just imagine if the U.S. Treasury had been smart and optimistic enough to invest a portion of its Social Security trust fund in the American economy, instead of timidly settling for the lowest return available every year (i.e. the three-month treasury bill)? In short, there wouldn’t be a chance of ever running out of money to pay the promised benefits. Perhaps incompetent and shortsighted politicians will be a story for another day.
There’s an old Wall Street saying which goes something like this: ‘When the market is going up, everybody’s a genius.’ But there were rocky times along the way, believe me, and a few severe market downturns when I felt about as far from a genius as there is – meaning plenty stupid.
This is a story about lessons learned from the worst of times in the financial markets, or in any career or life endeavor. It’s about optimal crisis behavior.
For a good example of a financial crisis, the year 2008 jumps prominently off the page.
Soon after the turn of the millennium, the ‘dot-com’ market calamity of 2000 had been exacerbated by the 9-11 terrorist attack on the World Trade Center, resulting in a three-year-long, 50% plus stock market meltdown.
It would be extraordinarily rare to experience a second ‘generational’ bear market so soon. But expected or not, in 2008, the elongated nightmare was happening all over again.
Throughout the calamity-riddled year, the stock, bond and real estate markets were plunging across the board. The Dow Jones Index had peaked on October 11, 2007 at 14,198. By the end of the ‘bear’ market, March 6, 2009, the same index hit 6470, a whopping 54% drop from the peak. The markets for corporate bonds and real estate were equally distressed, falling 40% or more in many cases.
The core reason for the plunge was a nearly total loss of faith in the debt instruments underpinning the residential real estate market – mortgages. Bank liquidity across the globe had evaporated largely as a result of incompetence – the primary culprits being U.S. government policy (yes, incompetent politicians again), and the greedy, profit-hungry behavior of much of Wall Street’s banking leadership.
As home equity across America stunningly disappeared, especially in sunbelt states, venerable companies and government agencies dealing in mortgage instruments began to disappear with them. The list of infamy includes Bear Stearns, Lehman Brothers, Countrywide Credit, Washington Mutual, AIG, Fannie Mae and Freddie Mac.
The 2008 Story Gets Worse
Throughout the decade, the haughty CEO of my long-time employer had been following his greedy peer’s ravenous behavior lockstep over the cliff. One of his primary goals appeared to be achieving an annual personal income rivaling the leader of Goldman Sachs, damn the consequences.
In many circles, Merrill Lynch had once been considered the greatest financial company in American history. By 2008, that was ancient history. They were reporting massive losses from mortgage write-downs and were essentially bankrupt (in the context of its liquid balance sheet).
On that infamous Sunday evening in September, we all watched with trepidation as Lehman Brothers employees carried their personal belongings in cardboard boxes from their Manhattan headquarters for the final time. The announcement soon came that the Federal Reserve had decided not to rescue Lehman, instead orchestrating Bank of America’s takeover of Merrill Lynch.
In the blink of an eye, it seemed, Wall Street had changed forever. The ‘Thundering Herd’ had been silenced.
Wrestling with an Octopus
How’s this for a dilemma? I’m in the business of selling financial advice and guidance, and especially confidence, to my clients. Yet, my place of business was prominent in the daily headlines as one of the villains and perpetrators of the ongoing financial crisis. The very wealth management firm my clients were relying on for security was a primary cause of the turmoil and uncertainty in their lives.
‘Oh, joy, oh rapture unforeseen.’
Another spate of unwelcome news broke over Thanksgiving that Merrill Lynch had underreported the depth of its losses. Amidst charges of deception and fraud, the deal with Bank of America nearly fell apart, probably leaving Merrill to the same fate as Lehman Brothers.
It wasn’t easy to strap on the old flippers and mask every morning and head down to the depths for another day of explaining, rationalizing, calming fears and emergency planning. My father had an old Bronx saying that comes to mind: ‘It was like wrestling with an octopus.’
But strap on the gear and show up at my desk every morning is just what I did. Because that was my job, the commitment I had made, to my clients, my employer and my family.
The legitimate question of the day, every day for many long months was, “If Merrill closes its doors, is my money safe? Should I move my money out of the stock market? Should I move it away from Merrill Lynch?
As the Honeymooner’s Ralph Kramden would famously stammer: “Homina-Homina-Homina.”
Perspective – A Real Crisis
I have an intrinsic pride and optimism about America. It’s not just blind patriotism, but instead a core belief in our miraculous system of democracy and capitalism, our inherent goodness, eventually overcoming all difficult times.
I learned this from my father who would often say: “Jimmy, never bet against Uncle Sam. You’ll lose every time.”
You want to hear a real crisis? Here’s one: In August 1945, my father was an 18-year-old quartermaster, a petty officer, steaming west from Hawaii on a Navy Cruiser for an imminent invasion of Japan. It was estimated the planned ground attack on Tokyo would cost a million American lives, with many more wounded. But it was the endgame, the only chance to win the war in the Pacific.
Two atom bombs altered those plans. By the grace of God – America, and the world’s, best days still lay ahead.
On the darkest days (and nights) of 2008, bleeding into the first quarter of 2009, I fretted first about my client’s portfolios and well-being, and then about my own. I had to stay positive and do my job at the office while also showing strength at home with my wife and two young children. It was a struggle at times, certainly, but I did the best I could.
Listening to spiritual and motivational recordings nightly by Wayne Dyer, Tony Robbins and others was a big help in keeping up my energy and health.
Those beautiful voices wrapped me in a big, warm hug of assurance, and reminded me to stay focused on the bigger picture – the few most important things in my life. When I’m thinking clearly, it’s health, family, friends and honor – being true to my word. Having a specific amount of money beyond basic shelter and sustenance isn’t near the top of the list.
Speaking of money, by late 2008, Merrill Lynch’s public stock had fallen from a peak of $98 to under $3 a share, wiping out much of my retirement plan that I’d been assiduously building for twenty years. My annual bonuses were paid in company stock that couldn’t be sold, not that I would have.
Previously unthinkable, we had become the latest Enron or Worldcom, two large companies whose stocks had incinerated just a few years earlier. All ghosts from the past. Then, I felt especially sorry for the employees, the victims who’d lost their retirement savings. Now, I just felt shocked, deflated and damn angry.
The good news? I was battle tested entering 2008, and my client’s portfolios were ‘bulletproof.’ They were well-conceived, high quality and diversified, including a store of cash for just such an event.
I knew they would be okay. If, that is, they followed my advice, which was the same every time we spoke:
“This is a difficult time, I know,” I would say. “But please try to relax. This storm will pass – they always do – and the last thing we should do is panic and sell our stocks near the bottom. We should never bet against Uncle Sam because we’ll lose every time.” You knew I had to slip that one in. Thanks, Dad.
Then I would say, “We’ve made sure you have plenty of cash flow to live your life, and that you’ll have plenty of assets to live out your life. Now, we should be looking for opportunities to add to your stocks. Buying top-shelf merchandise at bargain prices is a smart thing to do.”
History has proven, time-and-again, that’s it’s smart to buy stocks during periods of crisis, but it’s nearly impossible for the average person to do, which includes me. Human nature is our worst enemy. Our tendency is to be optimistic and risk-takers in the best of times, and pessimistic and fearful in the worst.
A courageous enough feat during the dark days of 2008 was holding onto the portfolios we already owned. That’s what I preached, and that’s largely what we did.
Leadership and Mentors
Just as my clients depended on me for strength and confidence – for leadership – I also looked for leadership to bolster my spirits. Besides Dyer and Robbins, my two favorite positivity gurus, two other true leaders in the financial world stood out: Warren Buffett, of course, the greatest investor of all time, and Jamie Dimon, the legendary CEO of J.P. Morgan.
They both stepped up bigtime in 2008 by expressing their optimism in several public appearances. Their clear message: the world is not coming to an end and this is the perfect time to be optimistic and bet on America. They certainly calmed fears and encouraged investors, including me.
Buffett’s investments tenets are well known, including this one: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” As usual, this was the perfect advice for the time.
As for Dimon, a notable hedge fund manager said this: “Thank God for J.P. Morgan and Jamie Dimon. He knows where the risk is in his institution. As such, J.P. Morgan avoided a lot of the major mistakes that were made by other banks.”
J.P. Morgan mostly avoided the crisis by eschewing its primary causes: subprime mortgages; structured investment vehicles, or SIVs; and collateralized debt obligations. Dimon understood the outsized risks and put short-term profits aside, saying, ‘thanks, but no thanks.
While Merrill Lynch and others were ravenously loading up on risky mortgages, Dimon was preparing for the inevitable downturn by cutting costs, streamlining computer systems, and opening or refurbishing retail branches.
Years later, in a ‘Friday memo’ to employees obtained by CNBC, Dimon said this: “Counter to what most people think, many of the extreme actions we took [purchasing Bear Stearns and other failing institutions] were not done to make a profit; they were done to support our country and the financial system.”
That’s called leadership, and it’s also called capitalism. Due to good, level-headed decision-making and being prepared, J.P. Morgan was able to benefit from the crisis.
I hope my story of dealing with a significant financial crisis helps you with whatever you’re going through, be it business-related or personal in nature.
Here are a few lessons, or takeaways to consider:
- No matter how difficult life gets, you must keep your commitments. Your word, the promises you’ve made, is all you have. Whether it be to your family, your clients, your boss, and especially tough, to yourself, you must be true to your word. If you are untrustworthy, if your words are empty, then you are no one.
- If you fall short and disappoint yourself and others, and if you’re human you will, then humbly apologize, forgive yourself and promise to do better. Focus on all that’s good, get a good night’s sleep, and start again tomorrow. If you never give up, never lose the spark, then there is no such thing as failure.
- When a crisis environment does arise, try to relax, breathe, think, write, pray, and put it into perspective. Is it a life or death situation? Have you been through this, or worse, before? How does this compare with crises that other humans are enduring right now, such as in Syria, northern Africa, Venezuela, or right here in America? Are you one of the lucky ones in comparison?
- If you are struggling, form a team to help you. Get coaching, mentorship, leadership, wherever you can. Seek out the people you know personally who radiate energy and enthusiasm. Read, watch and listen to wise and powerful leaders like Dyer, Robbins, Buffett and Dimon, those who’ve been through it all and come out winners. They are available all over YouTube, on websites and in bookstores.
- Visit Throomers often and read our inspirational stories. Get to know these extraordinary winners and you’ll never consider giving up. Keep your spirits and energy high, keep working, and get excited about your life. If not you, then who?
- Remember that financial markets generally move in extended cycles. Famous investor, the late John Templeton, said this: ‘Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.’
- In 2019, where are we in that cycle? My guess is, somewhere north of optimism and south of euphoria – a maturing market. Clearly, the pessimistic and skeptical days of 2008 through 2012 are long gone, along with the bargain stock prices they engendered. I’m not advocating market timing, but instead trying to understand where we are in the ‘Templeton cycle’ before making important investment decisions.
- Finally, speaking of investing and cycles, let’s listen once more to the great Warren Buffett: ‘We should be fearful when others are greedy, and greedy when others are fearful.’
Until next time – stay well, prosperous and forever thrilled with our many blessings, good fortune and endless opportunities.