Monday, 9 September 2013

5 Years On from Armageddon

In 2008, I was starting to explore the possibility of early retirement and ways to take more income from investments. At the time, I was receiving around 6% interest on my cash deposits with the Coventry BS so there was no great impetus to switch into equities. The FTSE 100 was around 6,000 and the yield would have been around 3%.

By the end of the year, the financial landscape had seen a sizemic shift.

FTSE 100   2008/09

The dramatic market falls started in September with the demise of US investment bank Lehman Brothers, and by early October the situation had descended into utter panic. The first week saw the main market fall by 9% followed by a whopping 26% fall the following week to bring the FTSE to below 4,000. The main casualties were banks and miners - RBS was down a massive 60% in just one week.

In many ways, it felt a bit like Armageddon!

Shareholders were not the only casualties of the turmoil. Thousands of savers with Icelandic banks such as Kaupthing and Icesave were left wondering about their savings when the banks suddenly went into administration.

The Government and Bank of England had to step in with a support package of £500bn to prop up RBS, HBOS and later Lloyds in an attempt to halt the wildfire financial panic. The chancellor at the time, Alastair Darling later said Britain was two hours away from total social collapse  -

"The risk I have always seen is that people forget just how close we came to a complete collapse and the thing about a collapse of the banks is that it wouldn’t just have been the banks in ruins, it would have been complete economic and therefore social collapse.

People without money can do nothing – you can’t buy your petrol, you can’t buy your food, anything".

A Buying Opportunity

In situations described above where fear runs equity markets, there is a disconnect between share prices and fundamental value which can offer great opportunities. Efficient market hypothesis goes out of the window temporarily and is replaced by a panic driven momentum.

Legendary investor John Templeton said famously "Invest at the point of maximum pessimism.”

During October/November I took a punt on several shares which seemed to have entered bargain basement territory - some were top ups of existing holdings - Petrofac (339p), Weir (320p), RPS Group (126p) and BHP Billiton (1054p), others were new additions - Wood Group (195p), Lamprell (74p), Vodafone (119p) and Prudential (250p).

In retrospect, I obviously regret not being a bit braver and buying more - within the next couple of years, the markets had witnessed quite a recovery and it would have been possible to secure a return of double, or possibly treble the sum invested - hey ho! During 2009, after an initial drop back, the FTSE finished the year up around 27% on a total return basis.

Some 5 years on and, for one reason or another, all the shares apart from Billiton have been gradually sold and the proceeds recycled into a far more diversified basket of investment trusts, other shares and fixed interest securities.

As an investor, this period of volatility was quite a scary ride but also a big learning curve.

The main lessons I picked up were that if you can become more relaxed about share price volatility, it will be possible to secure a better income (and better total return) by exploiting a shares negative reaction to poor market sentiment or short term bad news. Secondly, don’t get too panicky when markets are falling and keep on falling because an eventual recovery is inevitable. Finally, it sometimes pays to take a chance!

Having said that, I really do not wish to re-visit the market meltdown of late 2008 for a good many years!

If you were investing during this time, leave a comment with your memories.


  1. Yes, I too, picked up many bargains in the dark days of 2008/9. I've sold off some but some I still have.

    What Armageddon taught me is always to keep a big cash reserve as you never know when buying opportunities might call.

  2. "always to keep a big cash reserve as you never know when buying opportunities might call"

    Keeping that cash out of the market hoping for a crash would mean forgoing dividends that could be earnt had it been invested in the meantime. Decisions, decisions!