Even the smartest guy in the room sometimes makes mistakes.
Jamie Dimon, CEO of the huge U.S. bank JP Morgan, has been
called the smartest guy in the room for his ability to effectively steer the
bank through the economic crisis. And, while most of the other big U.S. banks
have tarnished reputations, Dimon’s firm was the one that stood out from the
crowd.
Unfortunately, that all changed last week.
In a hastily arranged conference call with investors, Dimon
revealed that the bank lost $2 billion in just the past six weeks on “bets
aimed at shielding the bank from the market fallout of Europe's deepening mess,”
according to The Wall Street Journal.
These “bets” lost money due to “unusual movements in the relationships between
various derivative indexes focused on investment-grade and junk-bond corporate
debt, both in the U.S. and Europe,” according to the Journal.
This debacle points to three important investment lessons:
1.
Keep
it simple. Trading fancy derivatives or using
complex black box trading strategies might give you an air of sophistication,
but it may also lead to your downfall. As Leonardo da Vinci said, “Simplicity
is the ultimate sophistication.”
2.
Pick
and track your investments closely. In describing the trades that blew
up, Dimon said, “The new strategy was flawed, complex, poorly reviewed, poorly
executed, and poorly monitored,” according to Bloomberg. Clearly, in this
ever-changing world, a “set it and forget it” investment strategy won’t cut it.
3. Be humble. Even
a smart guy like Dimon can trip up. One of the biggest errors in investing is
self-deception – thinking and acting like you are the smartest guy in the room.
It’s better to worry about what could go wrong – and plan for it – than think
you’re invincible.
The investment landscape is littered with formerly sharp
investors who forgot these three lessons. We plan on keeping them front and
center.
DOES IT MAKE SENSE that
a painting sells for $120 million in this economic environment?
You may have seen the recent headline that Edvard Munch’s
painting, “The Scream,” sold for a record-breaking $120 million. It made us
wonder what the implications are of an anonymous bidder forking over that kind
of cash for a pastel on canvas just three years out from a horrible economic
crisis. Does this mean happy days are here again?
Placed in broad context, the high sale price for a work of
art might be symptomatic of policymakers’ response to the economic crisis,
according to The Wall Street Journal.
When the economy began collapsing in 2008, governments around the world
responded by cutting interest rates and flooding their economies with monetary
stimulus. All this money sloshing around had to end up somewhere – and some of
it might have found its way into hard assets such as commodities, precious
metals, collectibles, and, yes, an Edvard Munch painting.
There’s something called the law of unintended consequences,
which means solving one problem might inadvertently create a new one. In this
case, the massive stimulus in recent years propped up the economy in the short
run, but it may have unintentionally masked the real problem and simply delayed
a day of reckoning.
With the following economic and political issues in play,
that day of reckoning may be nearing:
·
Eleven European countries have
experienced two consecutive quarters of economic contraction.
·
The unemployment rate across the
eurozone has matched a record high.
·
Job growth in the U.S. is slowing.
·
The Chinese economy is slowing.
·
The political situation in Greece is
chaotic.
·
France has a new Socialist president.
Sources: MarketWatch, The
Wall Street Journal
Now, the good news. In any economic environment, there will
be winners and losers. As the steward of your financial life, we do everything
we can to try and help you land on the winning side regardless of what the
economy and markets throw in our way.
Weekly Focus – Think About It
“Nature is pleased with simplicity. And nature is no dummy.”
--Isaac
Newton, English physicist, mathematician, astronomer, natural
philosopher,
alchemist, theologian… yes, a really smart guy!
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