When people say the “good old days”, it triggers a feeling of nostalgia where you’re thinking of a better time (Not Davido’s). It gets very easy to become caught up in the feeling till you even begin to think that life was always better in the past.
Well, let me tell you something different, it hasn’t always been. Mistakes have always been and even when it comes to finances and investments there have been serious mistakes that probably made world news and attracted the eye of everybody that cared to know (and even some who didn’t).
So, let me take you through a little list of very famous investment mistakes from the past and what we can learn from them so we don’t repeat them. Remember the saying, those who don’t learn from history are bound to repeat it.
1) The Great Depression
This might be the most famous of them all and you would’ve probably heard of it. It happened in 1929 and took about 10 years to recover.
Many investors bought stocks on borrowed money; most of them did this because the stock prices were doubling and tripling in a short period so naturally, everyone wanted to get in on it. When the market crashed and the stock prices fell, it wiped out millions of investors.
With the losses incurred, brokers needed the investors to add more money to cover the losses (known as margin calls in investment) and this triggered a wave of selling. Now, here’s the Domino effect; the crash caused people to rush to sell their investments, which affected the banks and the banks started to fail. At this time, when banks failed, there was no federal insurance for bank deposits, so people lost their life savings.
Losing their money reduced their purchasing power which caused reduced demand, further worsening the economic situation as businesses faced declining sales and in turn, companies laid off workers and the unemployment rate skyrocketed; what a vicious cycle it turned out to be.
Lesson: All this trouble began from avoiding the dangers of overleveraging and succumbing to market euphoria, an exponential increase in stock price without a clear explanation of the increase. So, avoid excessive leverage, especially in a rapidly rising market. Market euphoria can quickly turn into panic.
2) The Dot-com Bubble
You know when something begins and progresses steadily and rapidly, and everyone’s going, “Raise am! raise am!”? That was the case. The Internet was rapidly emerging in the late 1990s and early 2000s and its potential to transform communication, business, and everyday life drew massive interest from investors, entrepreneurs, and the general public.
Many internet-based companies, known then as “dot-coms,” went public and investors eagerly bought shares in these companies, driving up prices on the first day of trading. Rather than profitability, hype was the order of the day, companies were being overvalued; they were marking territory and asserting dominance, rather than focusing on profits.
Venture capitalists also poured money into the startups; Lots of money plus no clear business model for sustainability and profit equals disaster, which was what happened when the bubble burst. When the reality of the overvaluation set in, investor sentiment shifted and the market began to decline sharply, losing nearly 78% of its value by October 2002.
The bursting of the dot-com bubble contributed to a mild recession in the early 2000s. and investors lost trillions of dollars as stock prices plummeted. Many individual investors, who had put their savings into tech stocks, only had tears left.
Lesson: Invest based on a company’s fundamental value, not just market hype or trends, and ensure that it has a clear path to profitability. Another subtle lesson is to avoid putting all your money into one sector or type of investment; this helps protect your portfolio if a single market or industry collapses.
3) The Lehman Brothers Collapse:
The collapse of Lehman Brothers in 2008 was one of the most significant events in the global financial crisis, marking the largest bankruptcy in U.S. history.
Lehman Brothers started as a small business and became a major investment bank. It stretched its wings into various financial services, including investment banking, trading, and asset management. Lehman Brothers aggressively expanded its mortgage business, heavily investing in subprime mortgages and mortgage-backed securities (MBS).
During the early 2000s, the U.S. housing market experienced a massive bubble, with home prices rising rapidly. Lehman Brothers profited greatly during this period by underwriting and trading MBS, but the firm was increasingly vulnerable to a downturn in the housing market.
By 2006, the U.S. housing market began to dip as home prices fell and mortgage defaults increased, particularly among subprime borrowers. This led to significant losses for financial institutions heavily invested in mortgage-related securities.
The firm was highly leveraged, with a debt-to-equity ratio of about 30 to 1, meaning it had borrowed heavily to finance its investments. Throughout 2007 and 2008, Lehman Brothers attempted to raise capital, including a $4 billion capital raise in April 2008. However, these efforts were insufficient to offset the massive losses from mortgage-related securities.
On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. With $639 billion in assets and $619 billion in debt, it was the largest bankruptcy filing in U.S. history. The collapse of Lehman Brothers and the subsequent financial panic contributed to the worst global economic recession since the Great Depression.
Lesson: This one’s pretty simple; diversify your investments and avoid excessive exposure to high-risk assets.
Risk management is crucial, especially in volatile markets and Credlanche is a good investment company that helps you assess the risk in each of your investments to ensure you work with the best one for you.
Chat or call our customer service at (234) 812 – 3778 – 399 for more information on investment, credit, and asset management services to prevent a repeat of these “good old days”.