This blog post originally appeared on RealMoney Silver on Oct. 28 at 8:12 a.m. EDT.
"It is a common failing of man not to take account of tempests during fair weather." -- MachiavelliIt wasn't raining when Noah built the ark. Dr. Hyman Minsky wrote extensively that the essential characteristic of economic stability is that, in time, debt becomes increasingly easy to validate. In other words, it encourages leverage and, sooner or later, new and more ambitious debt structures. Dr. Minsky called these financial structures hedge, speculative and Ponzi. The more the economy moves from hedge finance toward Ponzi finance, the greater the susceptibility to instability. In other words, the more comfortable we get and the longer economic stability persists, the more dramatic the correction is when the trend fails.
"Never confuse genius with a bull market." -- An old Wall Street maximIn 2008, we learned that liquidity breeds stupidity and that stability is unstable. Peter Lynch once remarked that if an investor is going to panic, do it early. Though bad money appears now to be driving out good money, from my perch, it's now too late to panic. But let's all learn from the experience of 2008 as we regroup from our collective Minksy moment.
Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then, you think of possible courses of action. Then, you calculate which course is in your best interest. Then, you take the action.... This meltdown is not just a financial event but also a cultural one. It's a big, whopping reminder that the human mind is continually trying to perceive things that aren't true, and not perceiving them takes enormous effort. -- David Brooks, "The Behavioral Revolution" ( New York Times op-ed column Oct. 28, 2008)When I owned harness horses, my very first trainer was Delvin Miller, a legendary figure in the sport. Delvin was a friend of presidents and sporting figures such as Joe DiMaggio, Whitey Ford and Arnold Palmer (his best friend). One day back in the early 1980s, I was at the Farm Arena in Harrisburg, Pa., at the annual Hanover Shoe Farm auction of yearlings, and I asked Delvin for some guidance as I began to embark on a two-decade period of driving, breeding and owning harness horses. Delvin looked into the crowd and simply said, "Dougie, look at the crowd bidding for the horses today. Almost every year or two, you will see a different group of bidders for the yearlings, but you will always see the same sellers."
Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. "Look, those are the bankers' and brokers' yachts." "Where are all the customers' yachts?" asked the naïve visitor. -- Fred Schwed, Where are the Customers' Yachts? Or, A Good Hard Look at Wall StreetAs the year comes to a close, it is time to examine the job done by your financial consultants, stock brokers and money managers. For example:
- How closely did your adviser communicate with you during the market's meltdown?
- Was too much risk being taken in your portfolio? Was the level of risk taken appropriate for your goals?
- Were you complicit (read: greedy) in taking too much risk?
- How did your advisers respond to the market's downturn?
- Were defensive moves employed as the economic and credit conditions deteriorated?
- Was your adviser unresponsive to changing market conditions, acting instead like the proverbial deer in the headlights? Was he disciplined in taking losses, or did he let your losses run?
- Did your adviser treat your money like his? Did he have skin in the game?
- Did the commissions and fees paid to your adviser produce value to you in 2008?