5 Days That Taught Investors All They Need to Know

“I’ve learned everything I needed to know in five days, the last 15 years. The trick is not to ignore what’s smacking you in the face.”

In the business of markets, just a few days in a career can teach you everything you need to know. Whether you work on a trading floor, or just meet with a local investment club, the veterans talk of these days that are threaded into their psyche, their every trade.

This sage advice smacked me in the face Tuesday night, coming from a 20-year Wall Street trading veteran. After the craziness of the previous few trading days, he emailed to ask if I wanted to grab a drink. So we did.

For many, the last few days of a 1,000 point Dow Industrials drop and sudden bounce back were the latest mental imprint. We’ve seen the limits of the market tested, and at times seen those limits fail.

It’s not the first time and certainly won’t be the last.

Here are four days from the past 15 years that taught some harsh lessons—and a guess at the lessons investors will learn this time.

#1: March 10, 2000: The Nasdaq reaches its peak

The Nasdaq Composite closed at 5048 on March 10, 2000, marking the very pinnacle of the dot-com bubble. It was a level it wouldn’t reach again for a decade and a half.

As companies started folding and it became clear that the dot-com boom had largely been a mirage, stocks would lose more than a trillion dollars of value in only a few months. By the end of the crash, the tech-heavy Nasdaq would lose more than 75% of its market capitalization.

The lesson here is much in the build-up. Some investors had warned about stretched valuations, but many more people were saying that it was a new world. Never mind that technology companies in the Nasdaq had a mean price-to-earnings ratio of over 150 in March 2000. The argument by the believers was that technology was upending all traditional business lines and the Internet age would usher in a new era of sales, a new era of communications and a whole new metric for evaluating stocks.

These people were very wrong. If you pay too much for a stock, it won’t matter how rosy the future turns out to be; you will still lose money.

#2: September 15, 2008: Lehman Brothers fails

This is another one where the lead-in matters.

For people only slightly connected to the investment world, the big takeaway from this day is that two of the oldest, most venerable financial institutions in the world wouldn’t last. Lehman Brothers and Merrill Lynch would be out of business or sold by the end of the day.

But for investors, the key takeaway is diversification. At the time, markets had run hot for almost six years after the dot-com bubble burst. Once again, valuations were stretched and there had been some cracks forming in the credit markets – most notably in areas related to housing finance.

Money managers and advisors were preaching diversification. They said a crash was coming, but promised that you could insulate yourself by holding as many different kinds of assets as possible.

In this collapse, margins got called. People who were desperate for cash sold the assets that had held their value best. And when the ground finally stopped shaking, nothing was totally safe. Diversity can help, but you can never diversify away all the risk in investing.

#3: March 9, 2009: The market hits its bottom

In a lot of ways, this was still the middle of the financial crisis. Bear Stearns and Lehman didn’t exist anymore. The housing market was still collapsing in many parts of the country. The government was seemingly spending billions a week just to keep markets afloat. Warren Buffett went on CNBC that day and said that the economy had “fallen off a cliff.” And the Dow Jones Industrial average fell to its lowest point in more than a decade.

But March 9 was the bottom. Since that date, markets have rallied almost nonstop for the past six years with the Dow up about 10,000 points.

It’s a good reminder that nobody rings a bell when the market turns.

#4: May 6, 2010: The Flash Crash

The Securities and Exchange Commission in the mid-2000s helped deregulate trading with the launch of Regulation National Market System, commonly called Reg NMS. While the move to decentralize began before Reg NMS, the legislation paved the way for the floodgates to open for upstarts in the exchange world.

Dark pools and other alternative-trading systems followed. More and more trading went off exchanges. The role of a market maker was entirely changed and high-frequency traders rose to become a major market force.

Then, on May 6, 2010, a flash crash caused the Dow to lose 1,000 points in a matter of minutes. Blame fell on the high-frequency traders. But for active investors, most knew there was now no turning back the clock.

Five years later, the prevailing lesson for professionals has been liquidity trumps all–and to make sure to have a strategy if liquidity gets sucked away. Repeat after me: don’t use market orders at the open, don’t use market orders at the open, don’t use market orders at the open.

#5: Four days in August 2015: ETFs get tested

It’s still early days when it comes to the latest fiasco.

The obvious take-away is that China is not exactly what we had thought it was just a few weeks ago.

But many investors have been casting doubt on China for quite a long time. The bigger issue has surrounded the breakdown in exchange-traded and alternative funds. Many of these products had been built in the past five years and this was their first real test. A true market crash in China and a quick market correction in the United States put them through their paces.

Many did just fine, but as the Journal has detailed, many failed. ETFs that were at times billed as a cheap and liquid hedge to a broader portfolio may not be all they’re cracked up to be.

What did we miss? Send us an email to let us know what trading day from your past sticks with you.