When the history books are written, they leave out the bits that didn’t matter and line up in orderly rows what is now seen as significant, even if it was overlooked at the time. With the benefit of hindsight, it’s clear what was and what was not important. In real time, of course, it is far harder to see what is going on.
I am enjoying a podcast series at the moment on Watergate, which for obvious reasons is resonant today. What is fascinating about Slow Burn, however, is its attempt to bridge that hindsight gap. It focuses on the things that gripped America at the time but subsequently got left out of the scandal’s defining narrative, which for most of us is All the President’s Men.
The first episode tells the story of Martha Mitchell, wife of John Mitchell, the former Attorney General and head of Nixon’s re-election team in 1972. As such, she had both a front row seat as the story unfolded and a reckless desire to share what she knew in late night calls to her friends in the press. She was living dangerously and she paid a heavy price, hounded by the White House and discredited as an unstable drinker. She was right about the President and her husband, but only Watergate geeks remember her today.
There is a danger that as this Saturday’s ten-year anniversary of the collapse of Lehman Brothers approaches, we try to tie up this episode, too, into a neat morality tale. Boiled down to its essentials, it actually is a simple story but it didn’t seem so at the time when we didn’t know how it ended. And oversimplifying the financial crisis makes it all the more likely that we will not learn its lessons and will relive it.
Here is the short version that will be retold this week. In the years before 2008, banks forgot their basic business of taking deposits and making loans. Instead, they started dealing in the loans themselves, packaging them up into fancy new instruments on a false prospectus that this would make the financial system safer.
This snake oil didn’t wash for two reasons. First, because it was now unclear where the risk lay in these opaque and complex securities, now far from their originators. Second, because in order to feed the banking machine’s hunger for the profitable new products, more and more loans of lower and lower quality had to be made. An old-fashioned credit bubble lurked within a shiny new wrapper. When loans to people who should never have had them pressed on them inevitably turned sour, no-one knew where the bad smell was coming from. And a system built on the quicksand of broken promises crumbled.
To test the Martha Mitchell view of those times, what we actually thought as we lived through them ten years ago, I dug out my last column in these pages before I moved to Fidelity in March 2008. It was written in the week that Bear Stearns collapsed. Lehman was still a pillar of the financial establishment, far too big and important to fail.
Like Bob Dylan’s Mr Jones, we knew there was something going on but we didn’t know what it was. We only knew it was bad. As I wrote then: ‘for the first time since the economic anarchy of the 1970s, sensible people are seriously considering the possibility that the machine might actually grind to a halt.’
That might sound prescient but in the same breath I was clinging onto the wishful thinking that Bear Stearns was the cathartic moment that would mark the bottom. ‘The whiff of capitulation hung over some of the breath-taking share price falls yesterday’, I wrote. I was a year too early.
Too early, but not wrong. The market did recover from Lehman, and it did so surprisingly quickly. Even if you had been unlucky enough to invest in a collection of global stocks on the last trading day before the bank collapsed, you would have recovered your money within a year or so. In the ten years since Lehman imploded, the FTSE All Share has more than doubled if dividend income is included in the total return. That’s more than 8pc a year – and if anyone had offered me that as the bankers carried their boxes through Canary Wharf I would have taken it.
The biggest investment lesson for me over the past ten years, however, is that the fog of uncertainty in 2008 has never lifted and never will. As long as we operate in real time, without a crystal ball, we will never know what the next six months, let alone the next ten years, holds for us. And that’s fine because there is a solution.
Investment diversification is the free lunch that sliced-and-diced collateralised loan obligations pretended to be. In the decade since Lehman there has not been a single year in which the best-performing asset class has been the same as it was in the previous 12 months. There has also never been a year in which each of the main investment assets has fallen at the same time.
Putting your eggs in a variety of baskets is a lot less exciting as an investment philosophy than the apparent risk dispersion used to justify the weapons of mass destruction launched by the banks in the years before 2008. The difference is it works. Unlike the historians, we have to compose our investment stories out of the bits that matter and the bits that don’t. In the here and now, we cannot know which is which.
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Published by Tom Stevenson, Investment Director, Fidelity