Part of the reason for this blog is to share my feelings about current events. Part is that I enjoy writing. Part is that I hope it helps to inform others about our firm and our philosophy.
This morning I feel moved to write, as I am reading a book and various thoughts came together and became very clear…..and provided some real clarity.
I’m reading The Big Short, by Michael Lewis. He is a terrific writer, who has written a number of financial and non-financial books, many magazine articles, as well as wrote the book The Blind Side, which became the movie.
I am only part way through the The Big Short, which describes how a number of individuals placed huge financial bets against the home mortgage markets in the late 2000s, and made fortunes. The book is fast paced and very interesting, and as of now, I highly recommend it.
Yesterday, in a office meeting, as a result of a number of seminars that Keith and I attended in May, the word clarity was brought up. While reading this book this morning, I looked up the word clarity (in an old fashioned real dictionary): the state or quality of being clear; transparency; a difficult idea presented with clarity.
In The Big Short, it describes how Wall Street firms, mostly Goldman Sachs and AIG, combined and restructured residential home loans, most of very poor credit quality, into what later became AAA loans (top rated and considered very safe). Essentially, these investments/products were the complete opposite of “clarity,” to everyone except for the few individuals who are featured in the book, who truly understood what a sham these products were, and were willing to bet against them. As Lewis describes it, Goldman and others took lead and turned it into ore, and then turned it into gold, then sold the gold to investors. If a portion of the lead was not immediately turned into gold, they would take the residual lead, and then turn that into gold also (from page 76).
This is meaningful to me, and thus my clients, as I consider the evolution of my firm and our investment philosophy from day one. One the fixed income side of investing, we have completely avoided corporate bonds (debt), due to the academic research that showed that the risk of default, while relatively low, was not worth the risk. When first presented with these concepts and information in 2002 and 2003, I was skeptical. I followed the advice, but did not completely buy into it. But it was totally correct. With new clients, we almost always sell many of their fixed income investments, as we do not think they are safe enough. On behalf of a non-profit that I’m involved with, I had many discussions about these matters with a top leader many years ago, who has since passed away. Fortunately, they agreed with me and we restructured their investments. We have almost always purchased only CDs, and top-rated municipal bonds and governmental agency bonds for our clients. We can understand these. They are clear and transparent.
When it comes to alternative investing, a phrase for hedge funds (which are mutual funds that are private, not like public mutual funds, in which the investors really don’t know what the manager is investing in), we have also avoided these, for many reasons. Most importantly, if you can’t see what you are investing in, and can’t understand it, why would you invest in it?
So back to clarity. The investments we use for our clients, to implement their investment plans, are clear and straightforward. They are not hard to understand. The result of this is the comfort that the clarity provides. By knowing and understanding what you are invested in, and that you have an investment plan, we have provided clarity and comfort.
In Michael Lewis’ book, I’m reading about the products and actions that Goldman Sachs and AIG and others are doing (or were doing a number of years ago). While I do understand it, it is beyond comprehension, in terms of rationality. There was not clarity to the American public. There was not even clarity to many of the people and companies that were involved. There certainly was not full disclosure (and Lewis has some strong comments about Goldman Sachs!).