"History doesn't repeat itself, but it does rhyme." The fact that Mark Twain didn't say it doesn't make the quote attributed to him any less clever, because investors can see those rhymes and almost-repetitions time and again in the markets, and that's certainly been the case over the past decade or so. As we pass the 10th anniversary of the bankruptcy of Lehman Brothers -- an event that woke a lot of people up to just how serious the looming crisis' underlying issues were.
In this episode's "What's Up, Bro" segment, Motley Fool Answers cohosts Robert Brokamp and Alison Southwick reflect on the worst U.S. downturn since the Great Depression, the nature of the recovery, and what "getting back to normal" meant this time around. And with the luxury of hindsight, they offer a key takeaway to remember next time the market and the economy tank.
A full transcript follows the video.
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This video was recorded on Sept. 18, 2018.
Alison Southwick: So, Bro, what's up?
Robert Brokamp: Alison, I recently had a bit of a flashback. I was reading The Wall Street Journal, an article by Jason Zweig, and he told the story of a guy named Barry Popik who on September 1st received a check for $35.98, and that's all that's left of the $25,000 he invested in Lehman Brothers preferred stock in February of 2008. Mr. Popik had already owned Lehman Brothers common stock at that time. It's implied that he inherited it from his parents who got it from his grandparents, so it was already in the family. He was familiar with the company. Plus, at that point, the company had just reported record revenues, so he was pretty comfortable with it.
And the reason it brought back memories is because this preferred stock at the time yielded almost 8%. And my mom called me and said, "Hey, Lehman Brothers has this new preferred stock, 8%. Should I get it?" And I said, "I don't really know enough about the company. I'm no big fan of preferred stock, so I wouldn't do it." Fortunately, she took my advice.
Southwick: Oh, good!
Brokamp: Because, as we all know, we're now celebrating the 10-year anniversary of it. Lehman Brothers went bankrupt on September 15th, 2008. And the thing about that story is that I'm sure Mr. Popik was thinking what my mom was telling me, and that was Lehman Brothers is this huge company. It has been around since 1850. It was one of the oldest companies that was still publicly traded. What possibly could go wrong?
But, of course, it did go wrong. And it's not the only one. Bear Stearns, of course. Washington Mutual. And the market, itself, went down more than 50%.
So I was thinking back to those days and one of the things I kept thinking was whether we are ever going to get back to normal, because so many big companies were down significantly. The market was down. It was the worst recession since the Great Depression.
Well, here we are 10 years later, so let's look back. Did things get back to normal?
So, what is normal? One thing that is normal that we always talk about is the stock market historically [the U.S. stock market, at least], has returned 10% a year. What has the S&P 500 returned over the last decade since the bankruptcy of Lehman Brothers? 11%. 1%. So it's done even better.
One thing that is also normal is that small stocks, over the long term, outperformed large stocks. Did that happen over the past decade? Yes.
Brokamp: Check. They returned about 11.7%. And the other thing that's normal is that over the long term, stocks beat cash and bonds, and that has definitely happened. Cash basically has returned nothing over the last decade. Just recently have you now been able to earn a little bit on your cash. The bond market returned a little over 3%.
That is actually better than a lot of people thought because with interest rates going up, a lot of people thought there would be just horrible returns for bonds, so they're returning 3%. Not great, but better than cash and it's a pretty safe investment.
All that said, there are some things that either were abnormal or at least of note. The day after Lehman Brothers declared bankruptcy, there was a big money market fund that basically lost 3%. Money market funds traditionally traded as a dollar a share, and people were treating them as cash. But because this fund owned so much Lehman Brothers debt, it actually dropped in value, which was something that had never happened before. And since then, there have been new rules put in place to prevent that from happening, but that is something that has changed.
Also, not other types of assets have done as well. For example, commodities have actually lost money over the last decade. That is also something that is extremely rare in history, and when it started happening in the first few years after the Great Recession, commodities were covered OK but then started significantly underperforming U.S. stocks, and there were articles coming out like they've underperformed stocks, now, for three years to six years. That's never happened. This is going to turn around at some point. But it still hasn't, so it's another example of where the future turns out a little bit differently than history.
And then finally you look at international stocks. International stocks have done OK, but not as well, so they've returned, on average, a little over 4% a year. So over the last decade, U.S. stocks have outperformed international stocks by 7% a year. That is also a pretty extraordinary run in terms of the difference between the two.
Still noteworthy, but not as unusual, is that over the last 10 years, growth has outperformed value by about 3% a year. That happens all the time, but those switch places. So anyone looking to weight their portfolio one way or another based on what's happened; I would say you might want to tilt your portfolio a little more toward value, because history shows that after a decade of growth outpacing value, generally speaking, the next decade is different.
For me, the bottom line of all this is for those who were really panicked in the throws of the Great Recession and managed to hold on to a diversified portfolio, history has shown that it's the right thing to do. But, there were things that happened that people didn't expect. People didn't expect a company that was formed in 1850 to go out of business. People did not expect commodities to lose money over the next decade. And people didn't expect, necessarily, that international stocks would be trailing U.S. stocks so much.
Southwick: So basically what you're telling me is that some things remain the same and some things will be different.
Brokamp: Exactly! So you have to own all the things...
Southwick: Profound thoughts...
Brokamp: ... so that no matter...
Southwick: Profound thoughts with Robert Brokamp.
Brokamp: ... so no matter what happens, your financial plan will be OK.
Southwick: But seriously, is the advice just to be diversified?
Brokamp: And to account for the fact that really some things that you expect to happen won't happen.
Southwick: That's the resident awfulizer I love to have in this studio.
Brokamp: And it could be good. It could be something that you expect to be not so great turn out very well, but you just don't know when it's going to be.