Lessons from past bear markets with Barton Biggs

"Some of the best lessons we ever learn, we learn from our mistakes and failures. The error of the past is the success and wisdom of the future."

• Tryon Edwards

2008

It was the beginning of 2009 in the depths of the market crash and the Global Financial Crisis. We had yet to find a bottom in markets. Morgan Stanley was just inches away from declaring bankruptcy before being bailed out by foreign entities. I recall it to be around February when a legend of Wall Street, the elderly 75-year old Barton Biggs, walked into the Morgan Stanley Investment Management office here in Singapore. The office that he himself set up in the 1980s when the Singapore asset management industry was still in its infancy. It's where I was working at the time as a portfolio manager.

Barton actually started Morgan Stanley's asset management business in the US back in 1975. He had joined the firm following his successful stint at one of the first ever hedge fund managers and had racked up an impressive 133% return in 8 years versus the 19% returned by S&P 500. He was not only Morgan Stanley's first ever Research Director but he also coined the term and was the first to use the title Global Strategist. He was good at it too. He predicted the bull market in US stocks in the 80s, the bear market in Japan and the bursting of the Dot-com bubble and the EM rally in the 2000s. He was a rare breed. I also appreciated his writing. His reports were always a good read and he was a great storyteller - I've enjoyed reading his books since too.

"But the investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner."

• Barton Biggs

Barton was passing through Singapore in his Asian tour to take a pulse of the market. He had retired from Morgan Stanley at the age of 70 but had set up a multi-billion dollar hedge fund remaining active as an investor. He graced us with his presence spending time with his ex-colleagues at Morgan Stanley to discuss the macro environment, and markets and opportunities in Asia in particular.

The markets were down almost 50% and everybody had lost their shirt. We worried we wouldn't have any money to manage when all was said and done. And more importantly, we thought we would all soon be out of a job. We were desperate for some guidance and sage advice from Barton. I asked him, "Barton - is this the worst thing you've ever seen?" He paused and thought for a moment, then he slowly opened his mouth. His answer was completely unexpected to everybody in the room. He said, "To be honest, I think 1974 was much worse." We all turned to each other and looked around the room and asked. Wait what? 1974?

1994

I began working in the industry in 1994 and I had been in the industry for 15 years at the time of Barton's visit, and it was the third major financial crisis I had experienced - the 1997 Asian financial crisis, the 2000 Dot-com bubble bursting and the Global Financial Crisis. As a student of financial history, I knew 1974 was a major bear market but had never really analysed it and thought it was just a run of the mill bear market. To be fair, I was just 2 years old in 1974, so it wasn't like I had really "lived" through it. At the time, most people were just comparing 2008 with the worst-case outcome we knew - the 1929 Great Depression.

We were young and stupid, and so walked away from the meeting unconvinced and saying to ourselves that Barton had "lost it" and become senile in his old age; that he had never experienced something like this in his life either as he was not alive in 1929 (the more accurate comparison when markets went down 86% from the peak); and that he really didn't know what he was talking about.

"As investors, we also always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways... Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving." Barton Biggs

It was several weeks later when the market had fallen further and Barton's visit was already a distant memory. His words had been dismissed as the wishful thinking of an aging, and out of touch, old investor. It was then that Newsweek published a new cover and as I happened to be walking past a magazine stall in Holland Village it captured my attention. It was in such starkly contrasting yellow and black colours that it jumped out at me and it was impossible to miss. I had to go in and buy the 10 or so copies that were on the shelf. All of it. And brought it back to the office to distribute to the team.The title was simple and straight to the point. "BUY! Don't believe the bears" - By Barton Biggs.

I am not sure what I was thinking or what triggered me to do it, but I just knew I had to buy it. I felt compelled to do so, and to this day I have the original copy stored away. It was published on March 16th 2009. Maybe just over a month had passed since his visit to our office and the market had made its final leg down by more than 20% from then. It was only much later, in hindsight, that we realized the market had already hit bottom and would never look back. The market low was reached on March 9th 2009. Barton had correctly called the bottom of the worst global financial crisis of our generation almost to the week.

S&P 500 reaches a bottom in March 2009

"At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of "the crowd" are tremendously important psychological influences on you. It takes a strong, self confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong. Also, be obsessive in making sure your facts are right and that you haven't missed or misunderstood something." Barton Biggs

Now, I'm sure Barton did not know in any greater degree of certainty how things were going to pan out in the future. Neither could he have envisaged all the things we would experience in the global economy and markets since then. However, he knew just a few things and he had enough to go with. The first was that as an optimist, he knew that the world would not come to an end. Secondly, thanks to the meeting we had, we now know that he thought that 2008 was not as bad as 1974. Thirdly, he knew from experience that when the market is raving mad and moving exponentially higher in a bull market or collapsing in a heap of depression in bear markets, enough is enough. In other words, he thought the market had priced in a worst case scenario and things would actually be better than the market's collective expectations. Finally, he knew that long-term, he would always prefer to be an owner of companies rather than a borrower to them. Equities were in his blood. He knew it wasn't a perfect science and sometimes you have to go with your gut. He made the call and the rest, as they say, is history. Unfortunately, with his passing in 2012, he only got to see a part of the recovery, but we of course now know that since his amazingly-timed call, the market never looked back and continued to power forward rising more than four-fold for beyond the next 10 years.

Market rose 4x for over 10 years from Mar 09 to peak in Feb 20

"It's as though you are in business with a partner who has a bi-polar personality. When your partner is deeply distressed, depressed, and in a dark mood and offers to sell his share of the business at a huge discount, you should buy it. When he is ebullient and optimistic and wants to buy your share from you at an exorbitant premium, you should oblige him. As usual, Buffett makes it sound easier than it is because measuring the level of intensity of the mood swings of your bipolar partner is far from an exact science." Barton Biggs

1974

When you look at what happened in 1974, you realize how shocking and powerful that impact must have been on a young Barton Biggs. The invasion of Israel that began the Yom Kippur War had resulted in an oil embargo and oil prices shot up to historic levels. The end of Bretton Woods and the depreciation of the USD had shocked currency markets. Inflation as a result went to double digits and interest rates spiked up. The US president Nixon was being impeached, and it was the first time in history that a sitting president had resigned because of this and there was political turmoil. The world was shell-shocked, uncertainty reigned supreme, and markets showed tremendous volatility on its way down. These were huge external shocks and the market cratered and ended up falling almost 50% from the peak.

Of course for Barton, despite having seen and experienced all the things he had by his age in 2009, the shock of 1974 was living still fresh in his memory. It is akin to my own experience of 1998 when Asia basically went bankrupt only 4 years after I started in my career. The traumatic experiences of that crisis is still etched deeply in my memory, as are the other two major crises I went through prior to now. In many ways, I see now that the 1997~8 Asian crisis, the 1999~2000 Dot-com bubble bursting and the 2008~9 Global Financial Crisis were more normal economic cycles. There were similarities in the classical nature of an asset bubble bursting and a banking crisis leading to an economic crisis.

A liquidity crisis begets a financial and economic crisis

2020

The reason I dug up this memory of Barton and that fateful meeting in Singapore, was because in trying to look back at history to see how we can compare our current situation, I realize that the current 2020 bear market resembles the 1974 external shocks to the system and markets much more than the others; the fact that none of the events of 1973~1974 could have been predicted, and that we are experiencing a major socio- and geopolitical shock to the system and it coincides with a major disruption to the oil market and the currency markets, is also salient. The resemblances are not lost on me.

Just like in the other 3 crises, there is still a chance that the paths may eventually converge anyway, and that the stresses in the system leads to a liquidity crunch that leads to an asset deflation led economic crisis. However, there is a major difference between 1974 or the other crises and now. Even in 2008, many banks and financial institutions were allowed to go under, leading to further financial dislocations. However, what has fundamentally changed is the ample experience and readiness of the major central governments and central banks in using policy tools - both monetary and fiscal - to prevent this from happening. My next article will discuss these in more detail. But for now, we still have hope as the massive policy responses unfold, that if and when things do bottom and Covid-19 is stabilized as it is in China or even Korea, then the recovery will be a meaningful one because of the underlying stimulus that is being laid into the ground upon which that recovery will be built. Of course, we have to reach that bottom first and we do not know when that will be.

"Quantitatively based solutions and asset allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma." Barton Biggs

Yes, history only rhymes and is not always the same, nor is it repeated verbatim. We face unique challenges and we have just witnessed one of the fastest bear markets in history. We struggle with the relentless volatility and sharp falls in markets which also feel unprecedented. The Covid-19 pandemic is still playing out, the full repercussions of the shutdown in demand is still being felt and being measured. However, as long-term investors we need to go back to the basics. Where will we be 1 year and 3 years and 5 years from now? If we slept through this whole thing, would we still be higher or lower than we are now?

We held a Endowus Live webinar on Pandemics, Recessions, Retirement - where I shared the Barton story for the first time.

How markets perform before, during and after a recession (S&P 500)

In any recession, there is a period during which the market falls by an average of 30%+ from peak to trough (it could last anything between 3 months and 3 years!). The problem arises in that we do not know whether it comes before, during or even sometimes after the recession. In fact, the average market performance is largely flat in the periods before and during the recession. But after the recession is over, the recovery in markets is initially slow then strong and big. If we had slept through all of the 12 recessions of the past, we would not even experience the emotional rollercoaster and pains of that 30% average fall. We would just know in broad strokes that the market went nowhere for a long time then went up a lot. The question is even if we were awake all day and night trying to, can we time the bottom, like Barton did in 2009? The truthful answer, if we are honest with ourselves, is a clear no. As long-term individual investors, we have the option of executing on a regular saving plans that prevent us from having to time markets, which we know is futile.

If Barton were still alive and was with us today and I asked him the same question. Is this the worst thing you've ever seen? I think he may repeat what he told us in 2009. Maybe this is not as bad as 1974. Or maybe he may now say that this is not as bad as it was in 2008. But then again maybe it is. Or maybe it is just too early to tell. But I leave you with the last of Barton's many wonderful quotes why in March 2009, he could confidently put his name on the line and make such a bold prediction.

"The history of the world is one of progress, and as a congenital optimist, I believe in equities. Fundamentally, in the long run you want to be an owner, not a lender." Barton Biggs

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