Photo by Graur Codrin
THE THINKING INVESTOR
by Linda Postorivo
Snapshot: early 2008. A bookkeeper earns $50,000 a year in salary and takes an additional $50,000 a year (and has done so for the last three years) from the equity that has built up in his home via a line of credit or refinance. This is easily accomplished with very little paperwork because no one questions the idea that property values can only go in one direction...up!
The average individual has begun to view his income as coming from two sources: his job and his residence. He spends with reckless abandon and has no backup savings plan. Loan decisions are made within 48 hours with little or no verification of employment, income or assets. These loans are jokingly referred to as "drive through mortgages."
In hindsight we can all point fingers as to where the blame lies. There is plenty to go around. Ultimately, we all share the blame. The signs were clear if any one of us had just taken the time to look.
History has shown us repeatedly that markets are moved most heatedly by greed and fear. In 2008, greed ruled the world and no one was questioning the obvious signals that the house of cards was beginning to crumble.
Many would agree that the biggest betrayal of the public's trust was with the rating agencies. My contention is that everyone stopped doing their respective jobs and just walked around blindly letting someone else (the rating agency, the mortgage brokers, the mortgage company, the banks, etc.) do our homework and make important decisions for us.
So, what lessons have we learned from this painful experience? I hope we will never allow others to make decisions for us that we don't understand. We all have to take responsibility for our own financial well-being. If something looks too good to be true, it probably is.
As Investment Advisors, it is our job to do our homework and find the right people to fill the right positions. Many investors are still fearful of the stock and bond markets and are willing to close their eyes (Indexation) and stop thinking! This attitude is what got us into trouble in 2008. The debate over active vs. passive investment management is one that
has never been clearly decided. Both camps, however, are adamant about their positions.
Many of us agree that indexation is just allowing someone else to "do the thinking" for us. There are time frames that have proven that in certain market environments indexation has worked quite well, especially with large cap liquid securities and rational valuations. It is also true that during these times, a thrown dart works just as well.
Our recommendation is to surround yourself with first class money managers who know the companies in their portfolios. They study the balance sheets and have actual contact with the people who run the businesses on a regular basis.
They know the industries as well as their competition and are making good sound business decisions. I prefer to choose a manager who can tell you everything about the names in his portfolio rather than taking a chance on holding an index that is priced based on the headlines, which are emotionally reported on the evening news.
A Good Plan. Solid Asset Allocation. Great Managers
Let the thinking investor prevail...