“The market can stay irrational longer than you can stay solvent.”
John Maynard Keynes
I thought a lot about Keynes’ cautionary words during the summer of 2007. But in the end, being early saved me. And strangely enough, the World Series of Poker gets most of the credit.
In February 2007, HSBC wrote down over $10 billion in subprime mortgage-backed securities, kicking off a shit storm in the subprime mortgage world. That spring, the media was still treating it as an isolated problem. But you didn’t have to think very far outside of the box to imagine some kind of spillover to the broader economy.
I was heading out to Las Vegas to cover the World Series of Poker in early summer that year, as I had in prior years. Knowing the hellacious hours I would be working during those six weeks, I figured I wouldn’t have time to watch over my investments. My days would just be getting started as the markets were closing in New York. And if things started getting as dicey as I imagined, I didn’t want to leave my equity and commodity-laden portfolio unattended.
Before I left for Vegas, I stopped by my online broker’s office. I had already decided to park a portion of my portfolio in a mid-duration Treasury exchange-traded fund (ETF). But I wanted to find some decent paying CDs to park another chunk. The market was still chugging higher. And I think the broker on hand thought I was just another one of those panicky nut jobs. In his defense, that’s exactly what I was.
While I was there, the guy tried to talk me into investing into a diversified portfolio of ETFs. He said for a small fee (you know he lost me there), they would invest my money using a predetermined diversification model and every year they would automatically rebalance it for me. To humor him, I asked to see the model. The model called for a 6% weight in real estate.
I explained why I thought real estate was going to be a disaster of an investment in the coming year. I also explained that because I had a mortgage on my home, I was already essentially leveraged in real estate. Predictably, this argument didn’t faze him.
He gave me the typical dumbed down speech about diversification and why real estate was good to hold because it didn’t correlate to other asset classes, yada, yada, yada. His apparent coup de grace was explaining how if I lost money in my real estate investment that year, they’d just automatically plow more of my money in real estate the following year.
“Honey, to be honest, you lost me at hello,” I said as I managed a weak smile.
Did I lose money in the crash? Sure did. I still had plenty of non-cash, non-Treasury holdings. Did I lose a lot? Not really. I had cashed out a number of holdings, including half of my ConocoPhillips position prior to the WSOP. I ended up about 20% on my Treasuries by the time I cashed out. And best of all, I slept pretty well during the downturn.
I’d like to think I would have done just as well had I not gone to cover the 2007 WSOP. But I know that’s not true. I would have watched and waited. When the market dipped in January 2008, I might have held out for a dead cat bounce. When it bounced, I might have tried to convince myself that I was overreacting. And when the market ultimately went into freefall, I would have felt like I had no choice but to ride it out. I had the potential to duplicate the performance of the vast majority of retail investors — second guessing and drawing dead all the way to the bottom.
Instead, I spent a glorious summer playing my first ever WSOP event and taking these pictures. But the 2008 WSOP was probably the one that saved me the most — in an even more unusual way. But that’s another story.
WSOP Heads-Up Event Dealers
Godsmack frontman Sully Erna
The late Brandi Hawbaker