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Financial Opinion and Insights

Do You Remember These Incidents?

 

   

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

 

Crisis:  Russia devalued the ruble in August 1998, causing huge losses to international banks, hedge fund bankruptcies, and massive selling on the global financial markets.  

Change:  The Federal Reserve Board cuts interest rates by 75 basis points (0.75%) to provide liquidity.  

Opportunity:  The rate cut restored confidence and liquidity to global markets.  The MSCI World Index (an unmanaged index of world stocks)  from 937 on August 31, 1998 to 1155 on December 29, 1998, a gain of 18% in four months.  

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Crisis:  Mexico’s economy and government were brought to the brink of collapse by a credit crisis in 1994.  

Change:  The U.S. government lent Mexico $60 billion at the last minute.  

Opportunity:  In less than three months, Mexico’s stock market turned around.  The Mexican Bolsa Index gained 18% for the year 1995 and almost 22% in 1996.  Telefonos de Mexico, the country’s largest stock, fell to $25 a share but doubled in value in three years.  

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Crisis:  Europe was rocked by exchange rate turmoil and economic recession in 1992.  

Change:   The UK dropped out of the European Exchange Rage Mechanism resulting in an historic devaluation of the British pound.  

Opportunity:  A cheaper currency stimulated British export industries and made the country more attractive to foreign investment.  For example, Glaxo-Wellcome, the consumer products giant, slumped to about $15 a share during the crisis but has since quintupled in value, rising to a high of $75 a share.  

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Crisis:  The U.S. savings and loan industry faced insolvency in 1988.  

Change:  The U.S. government created the Resolution Trust Corporation (RTC), a $500 billion rescue plan.  

Opportunity:  In 1991, still in the midst of a banking crisis, investors could buy Citicorp for $9 a share.  That price appreciated to more than $145 before Citicorp merged with Traveler’s in 1998.  

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Crisis:  Chrysler, the nation’s largest automaker, was headed for bankruptcy in the 1970s.  

Change:  The government extended loans to keep the company afloat.  

Opportunity:  Chrysler stock was worth less than $5 until the mid 1980s, but rose to $50 per share as a result of cost-cutting and new products.  Daimler-Benz acquired Chrysler last year for approximately $57 a share.  

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In each of these crises, the media created a public perception of doom.    If there’s a single secret for long-term success, I think it’s this:  Don’t predict and don’t react.  

People who watch television trying to predict will virtually always get it wrong.  Face it, if that worked, Peter Lynch would have managed money that way.   If you’ve ever read anything by Peter Lynch, Warren Buffett, or most other successful investors, you know they didn’t pay much attention to “the market” at all!  I remember Warren Buffet saying he didn’t care if it closed down entirely.  

Remember, don’t confuse education with financial entertainment.

Written by Jim Lorenzen, CFP®, AIF®

July 20, 2010 at 8:00 am