The financial meltdown of 2008 was devastating for the majority of home owners and investors. How is it that when the real estate and stock markets were overbought and became volatile in 2007 and 2008 that investors did not take their profits and find safe investments or simply hold cash? At the start of 2009 Business Insider wrote that America lost $10.2 Trillion in 2008.
U.S. homeowners lost a cumulative $3.3 trillion in home equity during 2008, according to a report from Zillow. (MortgageWire.)
One in six homeowners is now underwater on their mortgage.
The stock market erased $6.9 trillion in shareholder wealth in 2008.
Add together the loss of housing equity of $3.3 trillion and the stock market loss of $6.9 trillion, and you’ve got a historic loss of wealth of $10.2 trillion.
To put that number in perspective, it’s almost one fifth of the GDP of the entire world. It’s about the size of the US Debt at the end 2008, meaning we could have paid off the entire debt of our government with the money we lost last year.
Is this going to happen again? As the bull market ages and shows signs of significant corrections, perhaps it is time to learn how to invest your money when markets are uncertain.
Growth versus Value
We recently wrote about the need to switch your investment focus from growth to value.
Unless the stock market stages an unexpected late rally, the month of February 2018 will be the first February since the 2008 market crash where stocks have gone down instead of up. Inflation is gaining momentum and interest rates are about to go up from years of historic lows. The unique financial conditions of the last several years have been ideal for high tech growth stocks, the FANG group especially.
But, now that conditions are changing, growth stocks are overpriced and at risk for a major correction. The better choice for many investors is to move into value stocks and other investments. But, what is a value stock?
The Dow Jones Industrial Average is down about 8% since we wrote that but the S&P 500 is virtually unchanged.
Listen to the Voice of Experience
On these pages we like to quote Warren Buffett. He is one of the three richest men in the world and often is number one depending on how Bill Gates and Carlos Slim are doing. And that is despite giving away several billion each year to charity. Buffett famously said that the first rule of investing is not to lose money and the second rule is not to forget the first rule. If you have made money on growth stocks in the bull market now may be a good time to take some of your money “off the table” because you indeed do not have a profit until you have taken a profit. Aside from cashing out of the market how can you learn how to invest your money when markets are uncertain? The key is to learn how to calculate the intrinsic value of an investment. Benjamin Graham showed us how to calculate intrinsic stock value in the years after the 1929 crash and Great Depression. This approach works for other assets such as real estate as well. Investors like Buffett have accumulated great wealth over the years by using this approach and never investing in something that they did not understand. If you do not understand how a company you are invested in is making its money then it is time to get out and take your profits.