In a couple of weeks you are going to hear a hundred analysts argue that the U.S. government made a multitrillion-dollar blunder in forcing Lehman Bros. (LEHMQ, news, msgs) to declare bankruptcy last September, complaining that policymakers turned a smoldering credit crisis into a wildfire.
And you will hear another hundred analysts explain that the U.S. government made exactly the right decision, arguing that by making a rogue institution pay the ultimate price for its sins of overleverage and overexpansion they crushed a moral hazard and saved the nation from worse ruin.
Neither of these retrospective arguments is going to help you make a dime, though. Or help you prepare for the next time this happens. That's my job.
You see, the reality is that neither you nor I was consulted on whether to put a pillow over Lehman Bros.' face and snuff out its life the weekend before Sept. 15, when Lehman filed for bankruptcy. And frankly, I don't have the slightest idea what I would have decided given the same array of fast-shifting data, politics, personal enmities, lies and moral biases, not to mention a burning desire not to look like an idiot to history.
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Did we act like cowards last winter, withdrawing to the safety of Treasury bills? Did we act like mercenaries, short-selling the weakened banks' securities for our own benefit? Did we just stand to the side in speechless awe, feeling helpless and dumbfounded?
Or did we have a plan to act at a time of crisis with mindful sobriety, waiting for a moment of maximum pain to arise to buy securities at their greatest discounts of the past three generations and make fortunes for our families?
The old fellows' march to profit
One would hope that it was the last, but after talking to a dozen professionals this week and reflecting on my interviews with fund managers at the time, I haven't found anyone who feels that he or she did exactly the right thing after the Lehman collapse and the crisis that followed. And that just goes to show how important it is that we lay plans now for next time, whether that's three months, three years or 30 years from now.Of course, this is not exactly the first time in history that financial collapse has brought opportunity, yet each generation fails to learn the lessons of the past and needs to experience those lessons anew. Back in the Wall Street of the 1800s, an era that was a lot more like the present than you might think, depressions and panics occurred with regularity, and making a plan for them was discussed often.
Inside the Lehman collapseThe most delightful, if impractical, plan is described in the classic financial autobiography "Twenty-Eight Years in Wall Street" by Civil War-era financier Henry Clews. In 1888, he wrote:
"Few gain sufficient experience in Wall Street until they reach that period of life in which they have one foot in the grave. When this time comes these old veterans usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers' offices. Then they always buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big 'rake in.' When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the upgrade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosom of their happy families."
It sounds so simple, does it not? Clews figured it out over 100 years ago. Pile up cash. Wait for financial panic. Buy good stocks coolly until the commotion peaks. Wait awhile as the panic subsides and the stocks appreciate. Use part of the profits to buy some cheap real estate on the rise, and deposit the rest in the bank for next time.
Continued: How to avoid the bear
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