It’s Different This Time…But It’s Also The Same.

The markets are correcting around the world trading somewhere between 20% – 45% from their highs of last year or in the case of Canada, three months ago. As some of the largest financial institutions unravel and close their doors due to excess leverage, lack of capital, and naked short selling, one starts to reflect on what is happening, when will it all end, and will everything go to zero?

It is somewhat different this time. The amount of leverage that institutions took on exceeded that of a commodity futures trader or an investor who was fully margined during the Great Crash of 1929. The complexity of the transactions, the volume and size is unparallelled. Companies like Lehman Brothers that have withstood market upheaval for 158 years are coming crashing down to earth.

Financial experts, Alan Greenspan, Ben Bernanke, portfolio managers, and others have not experienced the financial restructuring that is going on today. The crash of 1987 came quickly. There were some casualties but most survived and prospered. Interestingly enough, it was the brokerage firms in Canada that needed rescuing from the major banks after a bought deal with British Petroleum didn’t sell and the firms required injections of capital to survive.

So why is it the same? We will come out of this market having learned some more lessons. Sound lending principles will come back. Naked short selling will be curtailed. The structured products that came to market will no longer have a market of buyers. It is the same because the same companies that built their  businesses in the past on strong principles with limited debt will survive again as they did in the past and their investors will be rewarded with ever increasing dividends and share prices.

The companies that Sir JohnTempleton and Warrent Buffett made their fortunes on will continue to exist and flourish regardless of the markets over the long term. Nothing has changed in this regard. Fortunes in the market are made by buying low and selling high. We are nearing a low point and the ability to buy great companies at cheap prices is surely worth celebrating as opportunities like this don’t come along very often.

What are your thoughts? Do you think that the market represents good value today?

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