Thursday, January 22, 2009

The forest through the trees...

The odd thing about financial op-ed is that most of it is backward looking and generally useless for aiding a person's financial success as well as preventing financial ruin.

But every so often--usually about every 3 years, more recently every 6 months--an article appears that if it was the only thing you read, I mean really read with complete awareness, then acted on it, your financial situation would be free from worthless concerns about which growth fund will perform better next year. Sometimes these treasures exist outside of the financial press, but are more difficult to discern in my opinion.

I used to think I was really just blessed with a knack for finding the forward looking material truth. I also thought that my protectionist attitude over my mind was an important contributor to what some of my peers are amazed by. I now know that I deserve very little credit. Frankly doing this is relatively easy and much less time consuming. Yes, I am actually giving away the ship.
  1. Ignore anything with a conflict. Eliminate anything whose profit motive is to sell advertising, meaning viewership matters more than being right. They are incentivized to provide nuggets of enticing truth to keep people watching but with a bunch of filler.
  2. Ignore the people who always sound the same. Now you don't need to know who they are. Just find the few actually tell it like it is when everyone else is chanting their self-motivated mantra to your disbenefit. You don't have to find the others the first time. Search for news stories from 2007 with subprime
For example, Bill Gross at Pimco nailed this subprime crisis. He said it openly in his past newsletters.
Bill's cohort, Mohamed El-Erian who was past CEO of the $35 billion Harvard Endowment, said slightly cryptically in a July 2008 interview that the greatest concern is the higher than normal probability of the markets falling off a cliff ("fat tails" on the left side of return distributions). Later in the interview he was more direct talking about "Armageddon insurance" and recommends you "fasten your seat belt and don't put yourself in a position where you have to be a forced seller."
If you acted on these two commentators, you could be whistling dixie now with our financial system in a free fall. So do you want to make the same mistakes going forward? Who was giving you the same speech in late 2007 and early 2008 without even a casual acknowledgement of another possibility? Why listen to them now? Are these people more interested in saying things that make you feel good, so you like them, than in your future? If so, that is a very selfish person and not a true confidant.
The worst part is that this source of advice is the most likely to gradually give in to the idea that you have too much risk in your investments and should become more conservative and will be the last one to tell you it is time to get off the sidelines (when it is too late). That would be a tragedy, especially because it is preventable.