Five Years Ago Today – Pragmatic Capitalism

By Robert Seawright, Proprietor, Above the Market

This past week has offered multiple chances for reflection and retrospective as we saw the 150th anniversary of the Gettysburg Address and the 50th anniversary of the JFK assassination. Five years ago today was significant too, if not nearly at the level of those others.

Five years ago today, the markets were reeling. The most common emotions were fear and dread. Even though no less an authority than Warren Buffet had noticed the buying opportunity just over a month earlier, almost nobody was anxious to buy stocks.

But the Federal Reserve announced an $800 billion stimulus package in an effort to stabilize the financial system that day. This announcement came on the heels of thefederal government’s decision to spend over $300 million to rescue Citigroup by agreeing to shoulder possibly hundreds of billions in losses at the stricken bank and to inject $20 billion into the company.

Things would get worse before they got better (the low would come in March of 2009), but an investor who bought the market five years ago would be very happy indeed today.

Taking this sort of look back is a helpful reminder of how our emotions and biases can work against our best interests. Five years ago today, the predominant mood was panic, but buying would have been a very good thing. Today — at much, much higher levels – it’s hard to find many bears. My point here is not that the markets won’t go up from here. They may well go higher and perhaps a lot higher. My point is that market risks are much higher today that they were five years ago. For example, CAPE today is 25.43; it was barely above 15 five years ago. My analytical self tells me to be fearful when others are greedy and to be careful, to hedge, to lighten up or to take profits when others are doubling down.

Even though it feels like I should do exactly the opposite.

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.