When the World Trade Centre was destroyed in 9/11 in 2001, I was 5-years-old. I don’t remember a lot, but I do remember the setting where I watched the news, in my grandparents living room filled with three generations glaring in shock. The devastation that shook the world was also matched in the economic collapse that followed — but I didn’t know that then.
When the GFC hit in 2007, I was 11-years-old. I didn’t really know what was going on and my daily routine was not impeded in the slightest, but I remember feeling as if I was living through something major. I had no understanding of markets, no clue how the GFC was impacting anyone around me, and yet I would flood my parents with questions, with the most common one: “are we going to be poor?!” I like to think I’m more aware of my privilege 12 years later.
Today I am a 23-year-old living through a global pandemic called COVID-19. This time it doesn’t feel like a problem that’s very far away. My usual everyday concerns seem to have subdued as the everyday routine I knew a few months ago has quickly fleeted away. As our bustling cosmopolitan society has shut down from its core, the social impacts of COVID-19 have been felt by every person on the planet. But from what I understand, the worst of the economic impacts are yet to hit.
What I am wondering is: if 9/11 was considered a “once-in-a-lifetime” economic collapse, the GFC was also considered a “once-in-a-lifetime” economic collapse, and additionally, the Coronavirus is now understood as a “once-in-a-lifetime” economic collapse, then three of these collapses in my short life doesn’t really make sense. So have these collapses just been curveballs of bad luck? Or have we overcomplicated the stock market?
Let’s go back in history and see what happened during these three crashes.
What happened in 9/11?
When I originally wrote this piece, my initial interpretation of the 9/11 crash was pretty simple. The economic hub of the world’s financial district physically crumbled from a terrorist attack, so the economy did too. As someone who studied Social Science at UNSW, my interpretation of history is often viewed through a humanities lens rather than an economic lens.
This article ended up being passed on to Peter Switzer himself, who sat me down after he read it and gave me an economics lesson that I had actively avoided throughout university. As Peter explained (and he wrote about in much more economic terms than I will, in his article), the impact of 9/11 coincided with the dotcom crash, which Wall Street was recovering from when the Twin Towers were hit.
In simple terms, the dotcom crash was due to the overvaluing of a number of tech stocks listed on the Nasdaq, which gained excessive popularity because they were emerging Internet-related companies.
The Internet took off as an essential feature in everyone’s homes mostly in the 90s, so the popularity of Internet-related companies meant people didn’t really know a lot about the net, but because it had grown to be such an essential product in homes around the globe, tech companies were exaggerated in value.
Peter brought up a quote by Jeff Bezos, who we all now know as one of the most highly successful businessmen of all time for the success of Amazon. Amazon was one of the companies that survived the dotcom crash. During the crash, Bezos pondered how his company had gone from $100 to $6 in one day, and his operations had not changed at all.
What happened in the GFC?
Originally, I thought the GFC was basically due to a system overload from too much borrowing, a lack of loan repayments and a range of other factors.
I wrote that “our economic system doesn’t work when too many people are getting into ‘get rich quick’ schemes. So when too many of these things fly under the radar, the whole thing comes crashing.”
After my economics lesson with Peter, I learnt that the GFC was triggered by things called “NINJA loans”. He explained that “collateral debt obligations” (CDOs), which we can understand as loans, were being sold to banks, like the Lehman Brothers, by debt rating agencies who were not being truthful. These agencies were selling loans as if they were “AAA” loans, which are the best ones, but they were much lower quality, which destabilised banks who were giving away loans to people who just couldn’t pay them back. This saw the fall of Lehman Brothers Holdings Inc, who were the fourth largest investment bank in the US and filed for bankruptcy in 2008, which triggered the GFC.
Both Peter and Paul Rickard (who’s one of Peter’s business partners) said if you want to understand this in simple terms, watch the movie ‘The Big Short’.
What happened in the COVID-19 crash?
This crash is quite universally understood, as our businesses have shut down and no one usually puts a global pandemic into their risk assessment portfolio.
In March, over one week, global stock markets plummeted and it affected all stocks.
Many people were anticipating the stock market to crash around 2021, as we had been in a bull market for over 12 years. This means stocks were on the rise, and when they’re moving too fast, judging by history, they’re going to come down.
One of Peter’s other famous quotes he explained in our economics lesson was “markets take the stairs up and the elevator down”.
But obviously no one anticipated a global pandemic.
It’s too soon right now to really say whether this crash is over but markets are slowly on the rise again. The question now is: will there be another leg down?
So why have there been three “once in a lifetime” crashes in 20 years?
So back to my original question, why have there been three “once in a lifetime economic collapses” in my short 23 years of living? Well, I don’t think anyone has the direct answer to that, and I certainly don’t, but I’m determined to work out why and turn myself into the kind of investor who never becomes a financial casualty of this unbelievably complex money-making machine called the stock market.
But I guess an important lesson that the Oracle of Woollahra, Peter Switzer (he doesn’t ask his staff to call him that!), likes to share with his readers is not to invest in things you don’t understand.
To quote his book Join the Rich Club, Peter outlines 5 points from Warren Buffett’s investing lessons that he himself uses:
1. Do I like the management?
2. Do I understand the investment/company?
3. Can I write down the reasons for buying a company at a specific price?
4. I avoid gambling with stocks
5. I buy stocks of companies that people use for their goods or services daily.
Ultimately, what these three crashes have taught us that what happens in our everyday lives will impact the stock market. Don’t overcomplicate it and don’t invest in things you don’t understand.
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