Ten Years Gone: Investing Lessons From The Lehman Brothers Collapse

This week marks the 10-year anniversary of one of the landmark moments of the 2008 financial crisis: the collapse of Lehman Brothers. While investors, analysts and economists look back on the investment bank's downfall, it’s important for investors to learn from the mistakes of the past so they can anticipate and avoid those mistakes in the future.

Lessons Learned

Not all of the lessons from Lehman's bankruptcy are intuitive, said DataTrek co-founder Nicholas Colas. 

Lehman and the 2008 crisis are among dozens of examples of short-term market volatility that date back hundreds of years, Colas said.

Lehman’s downfall may seem like a long time ago, but market downturns are certainly not a thing of the past.

Colas said this week that a number of factors contributed to the Great Recession of 2008, not just Lehman’s collapse. Oil prices had spiked to $140/bbl and the U.S. economy was already on shaky ground prior to the Lehman scare. Paying attention to these types of economic signals and what they mean is extremely important, he said. 

Stocks only make bottoms when investors “give up” on an idea. A bear market often makes its lows when investors give up on stock prices going higher in the near-term, Colas said. The 2008 market dip was so extreme because many investors had given up on the U.S. financial system entirely when the market hit bottom in March 2009.

Expect The Unexpected

The engine of recovery for the market tends to be something new and different than what caused the downturn, Colas said. The financial sector was overheated prior to the 2008 crisis, but it's the tech sector that has dominated the decade since.

While bank stocks have lagged, FAANG stocks have dominated the market, despite being relatively under-the-radar back in 2007.

“Tech, of course, is the largest reason the S&P 500 is 80 percent higher than its pre-Lehman highs, and an object lesson in the importance of technological innovation in driving stock prices over the long term." 

Some Things Never Change

While the reasons for subsequent market cycles may differ, Ritholtz Wealth Management’s Josh Brown said this week that there is one thing that investors can count on to remain constant in the market.

“The investment industry changes while the securities and systems of each era come and go, but the nature of the people involved with those securities and systems never changes,” Brown said. 

Financial markets are nothing more than a collective of individual investors along with the ideas, hopes and emotions they bring to the table. Whether it's a housing boom, cryptocurrency craze, a bursting Chinese real estate bubble or a bond market collapse, investors can bet that the people who make up the market will behave exactly as they did when Lehman fell by the wayside a decade ago.

Related Links:

Why The Bitcoin Bubble Is Different From All Other Bubbles

Analyst Says One Word Will Dominate Markets In The Second Half Of 2018: 'Recession'

Lehman Brothers' New York City headquarters on Sept. 15, 2008. Photo by Robert Scoble/Wikimedia.