Sunday, November 30, 2008
Barry had a post about Bob Rubin's diminished credibility and while the post was a good read there was a secondary point in there that I think is a very useful learning tool (or reminder) for just about anybody.
In there was a snippet from the WSJ that included the following;
“Mr. Rubin... acknowledged that he was involved in a board decision to ramp up risk-taking in 2004 and 2005, even though he was warning publicly that investors were taking too much risk."
My take on this (and if you click through and read the whole thing you might agree) is that he knew there was greater risk but felt the bank would be able to out-maneuver that risk. I imagine there was some sort of complex plan of exactly how they were going to that. No doubt that going in it probably sounded pretty good.
Conclusion (fair or not): They were too smart for their own good. This is a behavior that does in all sorts of people.
This is something I have tried to be aware of over the years and why I try to make the big portfolio decisions based on very simplistic things like yield curve inversions and the market going below its 200 DMA. Both indicators warn you trouble is coming. They do nothing to tell you the magnitude of the trouble. I don't believe magnitude is the most important thing, certainly not as important as heeding the warning. Heeding the warning is more difficult than it sounds because there are so many people telling you why this time is different.
A good example of this is a debate of sorts I had with Howard Simons on the columnist conversation section of the RealMoney website in November, 2005 (I recapped this on my blog here). If you know who Howard is you know I will not out debate him on anything. My point was essentially inverted curve bad for financials and the market. Howard said it was less relevant because of how much financing was being done with floating rates. He clearly out debated me, his argument had many more points than my inverted curve bad but of course none that stuff mattered.
No one could accuse me of being too smart for my own good as I set out a very simplistic truism and stuck to it--sort of an Occam's Razor, maybe. No one can be perfect but I think making keeping it simple a priority can be a big contributing factor to long term success in the markets.
The picture is from the little mountain town of Makawao on Maui. It is one of our favoritve places in the islands.