The Right Lessons and The Wrong Lessons

It’s the one year anniversary of the fall of Lehman Brothers. The media marked that event as the start date of the financial crisis. Several financial podcasts I listen to all ran features on “lessons from the financial crisis.” I’m more interested in the lessons at a personal level, not so much at the macroeconomic level because there’s nothing I can do about macroeconomics.

After the dot com debacle, people learned it’s bad to speculate in stocks, but they also learned they can’t lose money in real estate. We all know how that lesson worked out. Today, after another crisis, people are learning more lessons. Will all of them be the right lessons?

Sell at the first sign of trouble. An acquaintance told me she moved all her stock funds into money market in early 2008 because she got nervous from the news of mortgage writedowns. That move was brilliant. It saved her tens of thousands of dollars. She dodged the proverbial freight train. I’m sure she will take that to heart — “when you see trouble, sell.” Is it the right lesson? I’m not so sure.

Follow the technical signals. 200-day simple moving average (200 SMA) is a simple technical indicator. A trading rule based on 200 SMA says sell when the price falls below 200 SMA and buy when the price goes above 200 SMA. A modified version of this rule adds a small cushion on either side: sell when the price falls x% below 200 SMA and buy when the price goes x% above 200 SMA, with x% being 1% to 3%.

This signal worked very nicely in the global financial crisis. Investors who followed this signal for S&P 500 sold in November 2007 when S&P 500 was about 1,400. They bought back in June 2009 when S&P 500 was about 950.

They didn’t sell at the top. Nor did they buy at the bottom. But that wasn’t necessary. Selling after stocks already went down and buying after stocks already went up still protected them from a 33% loss (950 / 1,400 – 1 = -33%).

The same 200 SMA signal also worked well in the 2000-2002 bear market. If an investor followed the signal, they would have sold in September 2001 when S&P 500 was 1,400 and bought back in April 2003 when S&P 500 was 900, avoiding a 36% loss.

Such a simple indicator worked miracles twice in a row. Math indicates that whenever there is a severe bear market, the 200 SMA signal will always protect the investor from big losses. I’m sure some investors will take the 200 SMA as a learned lesson from the financial crisis. I’m not sure it’s a good lesson though.

The right lessons are the simple ones that work all the time, not just in a financial crisis:

  • Carry no debt except mortgage
  • Live below your means
  • Invest conservatively in a low cost, diversified portfolio

They are so simple they don’t need any further explanation.

What lessons did you learn from the financial crisis?

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  1. Retirement Savior says

    Have you looked at the Meb Faber white paper that analyzes moving average timing? Long periods of outperformance and underperformance, but the risk adjusted returns are better in the long run.

    I like the article, it’s good food for thought.

  2. Mark Wolfinger says

    “They are so simple they don’t need any further explanation. ”

    Statements such as those are not typically made by people like yourself. Anyone who doesn’t understand any of your ideas ought to be encouraged to ask questions. That the path for that new investor to become an informed investor.

    If you tell him/her it’s so simple that he should be ashamed of himself for failing to grasp your full meaning, then your are negating that investors desire to learn – in effect saying ‘do it because I said so.’

    That’s what’s wrong now. The incompetent are leading the masses to ruin. Isn’t that what ethical bloggers are trying to reverse?

    You are helping investors. Please don’t discourage them from getting involved in the education process.

  3. Ted Valentine says

    I learned to keep buying. In 2000 I froze up and stopped buying. Recovery took years. I kept buying this time and I’m about where I was this time last year.

  4. Mark Wolfinger says

    Hi Ted,

    You ‘learned’ to keep buying?

    I argue that you did not learn anything useful. What you learned is that buying worked his time. And that it took a long time, but it worked in 2000.

    Legitimate questions, and I am not pulling your chain:

    What makes you think it will work next time?

    Do you ever sell?


  5. Ted Valentine says

    Regarding the 200-day MA. There are several pseudopods (false feet) on that chart. It is easy to pick the right ones in hindsight. In the moment, one might not make the right decision. See the following dates where the market placed its foot on the other side of the 200-day MA for a moment: Nov 2007, Dec 2007, June 2008, June 2009, July 2009.

    I would like to see someone study the 200-day MA approach with a buy trigger based on the market being a certain % below the MA (say 30%) and a sell or hold trigger when the MA is a certain % above the MA (say 20%). Call it enhance buying low and selling high.

  6. Ted Valentine says


    Fair enough. I learned that last time I should not have stopped buying. I had a plan and failed to implement it last time because it was too risky based on bad advice. This time I had a more sensible plan that I understood and stuck to it. Its worked out better than I thought it would so far.

    Next time? Who knows. I’m going to stick to my plan. We shall see how it works. Since you asked, do you know what’s going to work next time? Do you know what next time even is?

    Do I ever sell? At my age (mid-30s) I have a lot of time ahead of me, so I buy and hold. I plan not to sell, but to change my buying habits as I age (i.e, buy more bonds and fewer equities). Hopefully things will be very good and I will be forced to sell to reduce risk.


  7. Mark Wolfinger says


    I have no clue what ‘next time’ will bring.

    But I do know what will work: A strategy that guarantees a floor on the value of my holdings (and I can choose the location of that floor), with limited upside. That’s the collar strategy.

    I agree that I will never make profits like you do, but I won’t incur the losses either. i have far less time, so must be concerned with preservation of assets.

    Cheers to you as well.

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