Financial Crisis!

The terrorist attacks on the US on September 11 really shook up the investment markets around the world and reminded us all what can happen unexpectedly in the investment world. As most people in the investment industry expected world markets plummeted, London fell 5.7%, Paris, 7.4%, Germany 8.5% and the Australian market by 4.1%. In New York, the US markets closed for several days, the first time since the assassination of John F Kennedy. When the markets did re-open on 17 September the Dow Jones immediately lost 14%!

Not only has this effected investors but also the wider population, not just in the US, but all over the world. The US economy started moving ever closer to full recession, however to their credit the US authorities were quick to reduce interest rates in an attempt to head off total devastation to the US and world economies. Although world markets had been softening on the likelihood of recession, in part due to the “Tech Wreck”, but also as a result of the usual economic cycles of growth and recession. The events of September 11, not only accelerated the process but made it a lot worse than it would have been. The impact of the events of September 11 have been devastating to world markets and investors, but we have seen it all before. You see, we seem to forget these things happen on a regular basis and world markets take a tumble. Let’s look at the world’s most important index, the Dow Jones in New York, as I said before it fell 14% due to September 11, but it had already come off significantly from its highs in 2000. We should have a look at some of the

Financial Crises that have occurred in recent years so we can see what happens when something “goes wrong”.

The Market Crash of 1987 - Market fell 31% over a 3 month period. It recovered 27% over the next year.

Gulf War of 1990 -Market fell 16% over a 3 month period. It recovered 23% over the next year.

Asian Economic Crisis of 1997 -Market fell 10% over a 3 month period. The market recovered 23% over the next 3 months.

Russian Debt Crisis 1998 -Market fell 17% over a 5 month period. The market recovered 44% over the next year.

So what lessons emerge when we review what happens each time we have a significant market drop? The first is not to panic. The second is not to sell your shares as an over reaction or when markets have already fallen significantly. The third and final lesson is to seek out opportunities to buy shares that have been sold down as a result of someone else’s panic. The really “savvy” investor is the one buying when everyone else is selling.

When September 11 occurred, everyone dumped anything to do with airlines and travel. Companies such as Boeing and the airlines were dumped, as were just about everything else. Now, we all know that airlines were not in a good position anyway and should be avoided for the time being, but Boeing is a different matter. While airlines are suffering from price wars, it doesn’t mean people will travel less in the longer term. Even though travel numbers fell as people over-reacted to the WTC and Pentagon attacks, over the longer term people will always return to air travel. Therefore, the airlines would always need new aircraft, as ever increasing numbers of people travel. This means while Boeing may suffer a short term slow down in orders, it would always return and “catch up” in the medium term. Now, I’m not saying you should buy Boeing shares, I’m just using them as an example of what can happen in a crisis situation.

So, the rule in a crisis is, don’t panic and always take advantage of another person’s over reaction.

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