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).