Chickens Do Come Home to Roost

The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken (Bertram Russell).

I’d like start out by expressing sorrow over the plight of Bear Stearns, notably its employees. Collectively, they owned at third of the firm and, like other shareholders of the firm, saw the value of their holding disappear in less time than that it took to execute a trade.

Of course, some of those employees were in fact seven-figure income earners, and some of them made the decisions that eventually caused the firm to succumb to the harsh reality of the credit markets: that the excessive encouragement of risky asset creation often leads to discouraging results for the last people owning them.

However, most BSC employees were honest, hard-working employees of an investment dealer, just as I used to be (I’m still honest).

I imagine that a large portion of the discount from book value JP Morgan will receive in its purchase of BSC—if, indeed the sale goes through—will be written off, and large write-offs often portend large lay offs. And, as a professional who manages the wealth of other, herein lies a lesson worth learning.

Consider: the average person’s primary means of sustaining him/herself and dependants is her/her employment. A person’s secondary means of sustenance is his/her savings. But what happens if an employee’s savings is, to a large extent, tied up in ownership of the employer, as is frequently the case with companies that offer stock purchase plans? Then those factors which affect his job security will also influence the value of his/her savings as well. The Bear Stearns episode will long serve as a classic example of the too-many-eggs-in-one-basket idiom.

Of course, this is not they type of thing one tends to think about when things are going well, and have for awhile (see chicken quote, above). But then, that’s how the current problem began, by believing the profits earned from sub-prime mortgage generation and securitization would last forever.

It’s incumbent upon financial advisers to consider issues pertaining to diversification (and being over diversified has its costs as well).

The Winter of Our Discontent

Winning may not be everything, but losing isn’t anything. –Charles Shultz [Charlie Brown]

The severity of this winter in Ontario has, on occasion, invited comparison to the winters I experienced growing up in Montreal. Yes, we received more snow, and temperatures were, on average, more frigid. In fact, there is a section of town called “Snowed-in.” Yes, they spell it S-N-O-W-D-E-N, but they’re not fooling me.

As I recall, however, Toronto is a windier town, and wind can add more discomfort to the winter experience than either temperature or snow levels (unless, of course, you have a car, but I exclude that case because our family car typically winters in Florida).

As an aside, I’d like explain why I believe that most Jews believe in the effects of global warming: it’s because we have Jewish mothers who like to tell us how much colder the weather was when THEY had to walk to school. This applies in Montreal, Toronto, Miami…

Yiddishe mamas notwithstanding, once you get to thinking about winters in Montreal, you can’t help but to thing it’s known for: hockey, either the playing of it, or the almost-required-by-law devotion to the Canadiens—the “HABS”.

Of course, the Habs were easy to be devoted to. No North American professional team has won more champions, besides the New York Yankees of baseball. So it would be fair to say that winning wasn’t something Montrealers were accustomed to, it was something we expected. This applied only to hockey.

Well, I wasn’t good enough to play for the Habs, or even for the other Canadian-based professional hockey team that existed at the time, but I moved to that city anyhow and eventually became a portfolio manager (more about my career path in an upcoming issue).

Of course, as I grew out of adolescence and developed other interests, hockey—all sports, really—took on a reduced role in my life. I maintain an interest in sports in general, and not necessarily for the usual reason. I find that sports often serves as a useful microcosm for society in general. Put another way, societal change are often visible in the sports universe in a more easily understood way.

I could cite many examples, but the one that strikes as close to home as any of them is the issue of short term gratification. You see, when I followed hockey closely, I noted that coaches were hired for the long haul. Names like Toe Blake, Emile Francis, Punch Imlach, Harry Sinden, Sid Abel, and Billy Reay each managed his respective team for what seemed to me to be an eternity. And the overall winning (or losing) percentage wasn’t any different than as now.

Many years later, the point stays close to home. Portfolio Managers are expected to outperform their respective benchmarks each and every quarter, despite that fact that no investment methodology has ever done that, no matter how successful its long term track record has been. Last year was a tough one in the business, and I know of portfolio managers with good long term records who lost customers for one off year, and under circumstances beyond their control.

The bottom line: if you must fire something, try a puck

More from Shultz:

My life has no purpose, no direction, no aim, no meaning, and yet I'm happy. I can't figure it out. What am I doing right?”

“Life is like a ten speed bicycle. Most of us have gears we never use.”

“Don't worry about the world coming to an end today. It is already tomorrow in Australia.”

“There's a difference between a philosophy and a bumper sticker.”