2020 and the Great Crash we are experiencing
It was 2008, as I recalled my stock portfolio at the time was valued at around $20,000 AUD at the peak. Everything was going so well with my investments and I never made a stock loss since I started personally investing for myself in 2004 after graduating from business school. Every company I've picked as a stock investment was focused on banks, financial services, and some in the oil and gas sector. I was enthusiastic in participating in Initial Public Offerings (IPOs), every company I've picked was guaranteed that I was profiting and two most notable companies I made gains in was the then Tattersalls Group (a wagering company) and Goldman Fielder Limited (a wheat company spun-off from Burns Philp & Co.).
Then by late 2008, came the fall of Lehman Bros, who filed for Chapter 11 bankruptcy. It was widely believed to be an impossible event to many, because it was of the world's largest investment banks and seen as an impossible event. I remember seeing it on the news in the morning of that day as I went to work. As I entered the office of the investment bank I was working for at the time, I walked on the floor to my desk and as I looked around the office I could see everyone was in fear and had their heads to the screen as though they were all working extremely hard (of course not to get fired). Honestly from that moment, I've never had smelt the smell of death before until I was on my floor.
Within days, my colleague Alice, who is a friend of mine too. She said to me, lets go for coffee downstairs, and I agreed. When we ordered our coffees at the cafe, Alice's friend Steve, who I met before from Alice and also works for the same bank, showed up. Steve informed Alice and I that the bank made him redundant effective that morning and he had to pack up everything and wasn't allowed back into the office due to security reasons. I asked him if the redundancy package the bank offered was generous (if he didn't want to share, I said that is fine). He answered including the annual leave he accrued (which his service with the bank less than 2 years), he got a payout of half his salary. I estimated based on his position (because he worked closely with the CFO) he would have had a 6 figure salary, so if he had an $100,000 AUD annual salary, which was a lot at the time (and I didn't get paid that much), he would have been resulted with at least a $50,000 AUD on a pre-tax basis. I thought to myself like "WOW" I wouldn't mind myself to get made redundant and get a payout and move on, plus I didn't really like my job and no longer got along with my manager who was starting to give me a hard time at the bank.
Much later, in a bankwide restructure, my bank announced that there will be 10% staff reduction in headcount, I thought because I didn't get along with my manager, I wonder if I would get lucky. The head of our division announced there was a restructure to staff functional realignment and it was announced that a team from a different division that had the same function as our team was to merge with our team, one of the managers was to be made redundant or relocated to a different role. On the contrary, my manager survived and he was now the manager of the merged team, much to my disadvantage. However, I was safe and kept my job (but in all honestly I wanted to move on and get a payout).
By early 2009, another financial giant AIG, was on the brink of a collapse. This time, unlike what happened to Lehman Bros, the new Obama Administration intervened to save AIG. AIG was evenually bailed out by the US taxpayer. Then not long later, AIG paid out executive bonuses. I remember reading this in the papers and was outraged, I thought to myself, how can a company who was just about to go bankrupted and eventually got bailed out, has the balls to pay themselves a bonus. This is criminal and but however allowed under law. Simultaneously the stock market bottomed not long after. By that time, I lost $10,000 AUD in my portfolio value from around $20,000 AUD worth of investments at the peak or at cost base. A stock I owned Babcock & Brown LP, an Australian investment bank, collapsed and I lost most my money.
After all this, I was speechless and felt a mixture of being sad and upset. From all the glory days, I've made with my investments, this was the first time, I've experienced such losses and wondered what went wrong. Soon I read the financial paper that an Australian mid-size mining company OZ Minerals Limited (resulted from the merger of Oxiana and Zinifex) was on the brink of filing for bankruptcy. I was thinking how could two big mining companies that merged to become one bigger player could go bankrupt? Much later, a Chinese state enterprise Minmetals launched a full takeover of OZ Minerals and inherit the debt that OZ Minerals held. Because one of OZ Minerals' assets: the Prominent Hill copper mine lies within the Woomera Prohibited Area, the Australian government could not allowed the takeover to happened with Prominent Hill included in the deal. Minmetals later revised the takeover to acquire all OZ Minerals' assets other than Prominent Hill and a few other assets. The takeover proceeded, OZ Minerals was saved with a lot of cash but with a much smaller portfolio of assets. It was noted in the papers that when the merger between Oxiana and Zinifex occurred, Oxiana's debts did not properly disclose to investors the maturity dates of its debts which were largely due soon. That was why OZ Minerals was on the brink of bankruptcy. So the merged company had suffered from this, thus disgruntled investors had launched a legal class action against OZ Minerals for that improper disclosure.
So what did I learn from the GFC? The main thing I learnt from the GFC was debt management. Contrary to what a lot of people I know that say debt or credit cards are bad, I believe debt and credit cards are good subject to your ability to properly managing it. My current view is the use of debt is good only if you can keep on top of it and only use it for the purposes of acquiring assets that produce income (note: I said income, not speculation). Moments ago from completing this writing, I was on the phone with my cousin discussing about the coronavirus crisis and how it was impacting him and his family. He was going fine but working from home, and felt lucky because has a very safe and secure job. I said to him remember that time a couple of years ago you said to me: "Will, based on your circumstances, you should buy a car that suits your status." What he meant was that I should be a more expensive European car to express that luxury feel rather than how I'm still currently driving a Mitsubishi Lancer. I said to him at the time: "No I disagree with your views, I believe my money is better used when invested at least it can appreciate in value, whereas the car will depreciate in value." So today I reminded him, "See mate, how I was correct at the time with my view. At times like this, you want a bigger arsenal of liquidity to weather times like this and we don't know how long this will play out."
Fast-forwarding to my circumstances today, I have a much bigger ability to deploy more capital now and the $10,000 AUD loss I made during the GFC is now like tiny to some of the current paper losses I'm occurring with this coronavirus outbreak that made the stock market fall 30%. But I've only returned from a trip to South America and completed at least two weeks of self-quarantine. But because the probability of the stock market is falling more than the probability of it going up, I shorted some stocks and made some quick money on it, whilst still dramatically reducing debt. This crash is definitely much worst than the GFC and could rival the Great Depression, however there are a number of differences to point out between the two events:
Then by late 2008, came the fall of Lehman Bros, who filed for Chapter 11 bankruptcy. It was widely believed to be an impossible event to many, because it was of the world's largest investment banks and seen as an impossible event. I remember seeing it on the news in the morning of that day as I went to work. As I entered the office of the investment bank I was working for at the time, I walked on the floor to my desk and as I looked around the office I could see everyone was in fear and had their heads to the screen as though they were all working extremely hard (of course not to get fired). Honestly from that moment, I've never had smelt the smell of death before until I was on my floor.
Within days, my colleague Alice, who is a friend of mine too. She said to me, lets go for coffee downstairs, and I agreed. When we ordered our coffees at the cafe, Alice's friend Steve, who I met before from Alice and also works for the same bank, showed up. Steve informed Alice and I that the bank made him redundant effective that morning and he had to pack up everything and wasn't allowed back into the office due to security reasons. I asked him if the redundancy package the bank offered was generous (if he didn't want to share, I said that is fine). He answered including the annual leave he accrued (which his service with the bank less than 2 years), he got a payout of half his salary. I estimated based on his position (because he worked closely with the CFO) he would have had a 6 figure salary, so if he had an $100,000 AUD annual salary, which was a lot at the time (and I didn't get paid that much), he would have been resulted with at least a $50,000 AUD on a pre-tax basis. I thought to myself like "WOW" I wouldn't mind myself to get made redundant and get a payout and move on, plus I didn't really like my job and no longer got along with my manager who was starting to give me a hard time at the bank.
Much later, in a bankwide restructure, my bank announced that there will be 10% staff reduction in headcount, I thought because I didn't get along with my manager, I wonder if I would get lucky. The head of our division announced there was a restructure to staff functional realignment and it was announced that a team from a different division that had the same function as our team was to merge with our team, one of the managers was to be made redundant or relocated to a different role. On the contrary, my manager survived and he was now the manager of the merged team, much to my disadvantage. However, I was safe and kept my job (but in all honestly I wanted to move on and get a payout).
By early 2009, another financial giant AIG, was on the brink of a collapse. This time, unlike what happened to Lehman Bros, the new Obama Administration intervened to save AIG. AIG was evenually bailed out by the US taxpayer. Then not long later, AIG paid out executive bonuses. I remember reading this in the papers and was outraged, I thought to myself, how can a company who was just about to go bankrupted and eventually got bailed out, has the balls to pay themselves a bonus. This is criminal and but however allowed under law. Simultaneously the stock market bottomed not long after. By that time, I lost $10,000 AUD in my portfolio value from around $20,000 AUD worth of investments at the peak or at cost base. A stock I owned Babcock & Brown LP, an Australian investment bank, collapsed and I lost most my money.
After all this, I was speechless and felt a mixture of being sad and upset. From all the glory days, I've made with my investments, this was the first time, I've experienced such losses and wondered what went wrong. Soon I read the financial paper that an Australian mid-size mining company OZ Minerals Limited (resulted from the merger of Oxiana and Zinifex) was on the brink of filing for bankruptcy. I was thinking how could two big mining companies that merged to become one bigger player could go bankrupt? Much later, a Chinese state enterprise Minmetals launched a full takeover of OZ Minerals and inherit the debt that OZ Minerals held. Because one of OZ Minerals' assets: the Prominent Hill copper mine lies within the Woomera Prohibited Area, the Australian government could not allowed the takeover to happened with Prominent Hill included in the deal. Minmetals later revised the takeover to acquire all OZ Minerals' assets other than Prominent Hill and a few other assets. The takeover proceeded, OZ Minerals was saved with a lot of cash but with a much smaller portfolio of assets. It was noted in the papers that when the merger between Oxiana and Zinifex occurred, Oxiana's debts did not properly disclose to investors the maturity dates of its debts which were largely due soon. That was why OZ Minerals was on the brink of bankruptcy. So the merged company had suffered from this, thus disgruntled investors had launched a legal class action against OZ Minerals for that improper disclosure.
So what did I learn from the GFC? The main thing I learnt from the GFC was debt management. Contrary to what a lot of people I know that say debt or credit cards are bad, I believe debt and credit cards are good subject to your ability to properly managing it. My current view is the use of debt is good only if you can keep on top of it and only use it for the purposes of acquiring assets that produce income (note: I said income, not speculation). Moments ago from completing this writing, I was on the phone with my cousin discussing about the coronavirus crisis and how it was impacting him and his family. He was going fine but working from home, and felt lucky because has a very safe and secure job. I said to him remember that time a couple of years ago you said to me: "Will, based on your circumstances, you should buy a car that suits your status." What he meant was that I should be a more expensive European car to express that luxury feel rather than how I'm still currently driving a Mitsubishi Lancer. I said to him at the time: "No I disagree with your views, I believe my money is better used when invested at least it can appreciate in value, whereas the car will depreciate in value." So today I reminded him, "See mate, how I was correct at the time with my view. At times like this, you want a bigger arsenal of liquidity to weather times like this and we don't know how long this will play out."
Fast-forwarding to my circumstances today, I have a much bigger ability to deploy more capital now and the $10,000 AUD loss I made during the GFC is now like tiny to some of the current paper losses I'm occurring with this coronavirus outbreak that made the stock market fall 30%. But I've only returned from a trip to South America and completed at least two weeks of self-quarantine. But because the probability of the stock market is falling more than the probability of it going up, I shorted some stocks and made some quick money on it, whilst still dramatically reducing debt. This crash is definitely much worst than the GFC and could rival the Great Depression, however there are a number of differences to point out between the two events:
- The Great Depression occurred due to the stock market bubbling, inexperienced investors were all lead to invest and everyone was having a great time with the feeling of winning. January and early February of 2020 certainly had the same feeling as the stock markets around the Western countries saw record highs.
- When stocks crashed during the Great Depression and the government was slow to respond, many people were lining up for very few job applications after people were fired. Today, despite this viral outbreak and thanks to the technology available many jobs are still safe for now, as many people could work from home using computers, the internet, and video conferencing tools. Whilst at the same time many had already lost their jobs largely in the hospitality related industries and those employed in small businesses.
- A big fundamental difference today compared to the past, despite this being a viral pandemic, governments and central banks all over the world have provided very big stimulus packages and the lowering of monetary policy to stimulate the economy with interest rates being negative or zero in many cases.
- Despite being out of a job, people are still easily spending money when they want to via easy use of credit. So liquidity isn't an issue in 2020. But back then in the old days if you don't have the money, you can't buy anything you needed or wanted.
In summary, I just wanted to share my experiences with past crisis and my conservative nature to finances where I don't spend money ridiculously on a day to day basis especially on things I don't need. I've always had a natural investment mindset and over time, it evolved from speculation of stocks to now investment of stocks that provide cashflows such as dividends. My mindset is now more towards Warren Buffett's investment philosophy when you buy an asset, you don't worry what the price is in every 5 minutes, but instead to take a long term view of it.
Like buying a property, if you bought a property you don't expect it tomorrow it will grow 10% in paper value. You want to invest in a property based on what the rental yield is and you compare with other investments such as stocks or bonds. For example, if a property produces a 4% rental yield and a current term deposit (certificate of deposits) at a bank is producing only 1.5% interest yield. The property which is obviously higher risk, but offers a higher return would be a better investment opportunity subject to other factors you will need to consider. But if you are afraid to lose or don't like debts, then property isn't for you at all.
Like buying a property, if you bought a property you don't expect it tomorrow it will grow 10% in paper value. You want to invest in a property based on what the rental yield is and you compare with other investments such as stocks or bonds. For example, if a property produces a 4% rental yield and a current term deposit (certificate of deposits) at a bank is producing only 1.5% interest yield. The property which is obviously higher risk, but offers a higher return would be a better investment opportunity subject to other factors you will need to consider. But if you are afraid to lose or don't like debts, then property isn't for you at all.
It can also work the other way, many people I know they have around up to 10 properties in Australia and are highly leverage, they still have an average paying job. In their spare time, they are driving around taking Uber ride orders to earn a bit of extra coin. Now with the coronavirus around, the driving for Uber is pretty much near zero and potentially cannot collect rent when many people are struggling or out of a job. Their liquidity is pretty low and they have a nice car. So even if you sell one property now, you are more probable in selling it in a distressed market, so there is potential to occur a loss and the settlement period is at least 6 weeks after the exchange of contracts.
So my words to you are: "During peace time, you got to be prepared for war. During war time (like this coronavirus outbreak), you are prepared!"
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