• Financial & Investment Management Group
  • Tuesday, January 06, 2009

Nothing Happens 'til Something Moves

by Paul Sutherland
Posted April 10, 2008
FIM Group
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Can they make decisions? Can they act? Can I rely on them to do the tough things? That was my response when asked what characteristics I would look for in a money manager. Of course a similar answer would be given about essential qualities for any political candidate or CEO.

I went on to explain that many people are wired to just acquire information but never to apply it. An entrepreneur was telling me about a business school in which 8 out of 10 business faculty had never ran a business, owned a business or worked in the private sector. Amazing I thought; all theory no experience. Similar to our politicians, who I often think believe their job is to talk, study, argue, and not to "do".

Acquiring information is valuable, disseminating it is critical, but it appears for many that applying it is rather difficult. Or they believe that action is unnecessary. Sadly inaction can cause a crisis to deepen beyond the necessary. Regardless of market volatility, history demonstrates that people will still travel, eat out, go to school, buy flowers, make deposits and withdrawals, shop and do other activities. Yet many investors, politicians, and business people seem caught in a quagmire of inaction or fear-based action, centered around the theme that financial markets are on the brink of further collapse.

The chart below adds some historic context to today's banking crisis.

What is interesting about the four previous bank crises is that they were caused, according to a UBS analyst, by real estate price bubbles that flowed through the financial system causing loss of confidence in the banking system and creditor and depositor runs.

Historical accounts indicate President Hoover's political inaction to address issues before the depression. Our own Zach Liggett had first-hand experience while living in Japan during the epidemic stages of its banking crisis and cannot contain his ire regarding the slowness of the bureaucrats both in Japanese government, and with businesses. Perhaps the lessons from Japan and our inactions in the '30s have instigated the FED's swift action to help our economy through the current U.S. subprime crisis.

Most investors know that markets are cyclical; they at least read about the great depression in school, know about inflation and recognize that economics is about humans interacting with goods and services, time and money, investments and ideas. So why are people reluctant to invest in today's markets? Can investors not be forward thinking and consider this crisis an opportunity?

The key is to put the banking crisis into perspective and seek out opportunities. If you borrowed to buy homes with second and third mortgages and overextended credit cards, you're in a crisis. If you owned securities in an entity that, through lack of discipline and simple management, loaned to speculators then your portfolio is in a crisis. If you have been smart and made the right decisions then you are available to take advantage of the opportunities.

For example, JP Morgan was not silly in its risk management parameters and recently purchased Bear Stearns, at a fraction of the $18 billion it was selling for last May. Bear Stearns stock last May was $159- it is now being bought for $10 a share by JP Morgan. Our FED did act when they saw the risk and caused Bear Stearns, who was leveraged 44 to 1, to sell for about 6% of its former value. Sadly, it is estimated that one third of Bear Sterns stock was owned by employees who in many cases have watched their net worth collapse as their company's speculative practices did not reward them for the extreme risk they took on.

The point of this essay is not so much about the crisis and opportunity relationship, it is that knowledge must be challenged, continuously reviewed, and prudently used. An action-oriented decision-based system that challenges the current paradigm approach is what separates success and is required for continued prosperity.

As investors we must do something during these markets. Aristotle talked about phronesis which is the root of the word prudence and is the ability to think about how and why we should act in order to change things for the better. Aristotle linked phronesis with foresight, requiring that a prudent virtuous person should be thinking of the future consequences of choice and carrying out future acts with education, organization, efficiency and effectiveness. Investors must be prudent in their actions and of course are held to practice phronesis, by always evaluating how to prudently act to improve client portfolios.

In February FIM Group welcomed a number of new clients. Many came to FIM Group because of three reasons:

  1. They found their former investment manager did little in the way of management.
  2. They were handling their own investments and were frustrated by the results.
  3. They felt a forward-looking, common sense, global total-return approach was more rational than their current manager's passive, inactive, or specialized style.

As Einstein so eloquently stated, "nothing happens 'til something moves." And certainty the financial markets are moving. Trillions of dollars have been permanently lost by some and trillions of dollars will be made by those who use informed prudence as their guidance and buy solid investments from those that stand in fear, were imprudent and forced to sell (as in Bear Stearn's case), or panic.

For my birthday Amy gave me the New York Times Best Seller, Andrew Carnegie by David Nasaw, a biography of one of America's most famous and successful businessmen and philanthropists. What is interesting about Mr. Carnegie was his straightforward approach to seeing opportunity where other saw crisis, pain and hopelessness. He created part of his fortune during the Civil War, by investing when others were timid, lethargic or guided by fear.

I am optimistic that our clients and our investments will be part of the trillion dollars made going forward that I can barely wait for my alarm to go off in the morning to get to the office.

We at FIM Group are energized by the opportunities we see in the markets and know the bottom line is that the markets will always move and future profits come from today's actions.

 
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