Wednesday, November 12, 2008

Financial Crisis - Historical Perspective

The current financial events in the news are all well documented. In the era of 24/7 news coverage, we can all get our fill of bad news instantaneously. The events taking place in 2008 are unprecedented.... or are they? Every financial event is unique to its time & place. And, there is no doubt this time around there is a simultaneous nature to what is going on. However, many of these same issues have occurred throughout history. So, on one hand, the issues are new - especially to investors who started a mere 10 years ago - but, to old timers, this is more of the same. Let's have a look:

  • Franklin National Bank Collapse (1974)
  • Chrysler Near Bankruptcy (1979)
  • Continental Illinois Bank Collapse (1984)
  • Drexel Burnham Lambert Failure (1986)
  • Market Crash of 1987 (22% decline)
  • Orange County (CA) Bankruptcy (1994)
  • Barings Bank Collapse (1995)
  • Long Term Capital Demise (1998)
  • September 11, 2001
The list is rather extensive, but these are only a few examples. What's old is new again? Perhaps. Let's change a few names and see what changes: Washington Mutual, General Motors, Bear Stearns and Osprey Capital. Any difference? Nope. Been there, done that.

Capital markets have proven time and time again to be very resilient & efficient. The recovery times will always vary. But, companies with clean balance sheets (i.e. no debt) and positive cash flows will always be rewarded. Investor emotions can sway short term valuations, but fundamentals always dictate in the end. There is still a lot of uncertainty in the market place, but have faith, bad news isn't permanent. Once calmer minds prevail and emotions subside, investors (individual and corporate) will return to making rational financial decisions.

1 comment:

On the Side Lines said...

Historic perspective, very often ignored in these national and political situations, is very important to take into consideration. As bad as the commentators say the present situation is, we must remember that, in the '29 crash, unemployment was at the astronomical 25% level. We are no where near that now.