[quote=Allan from Fallbrook]Dave: Okay, and I’m retorting a little tongue in cheek here, but, dude! While I would certainly concur that certain folks aren’t equipped to own stocks, I would also point out that your post is, in part, somewhat disingenuous.
In terms of valuation and volatility, we have parts of an entire industry (MBS) that were literally shit marketed as gold and done so with the implicit and explicit support of rating agencies (like Moody’s and Fitch), investment banks (like Bear Stearns and Lehman Bros) and blue chip insurers (like AIG). You have instruments that would be lucky to be considered junk bonds marketed as AAA rated and sold as such to buyers and buyers whose only mistake was trusting the rating agencies, bankers and insurance companies.
The entire finance system is driven by trust and, through a nearly insane confluence of greed, deceit and hubris, it was nearly blown up. You yourself made the point that we’re not facing a credit crunch, rather we’re confronting the fact that there are billions of dollars of crappy assets out there, soiling up the balance sheets of thousands of companies, banks and funds and that’s causing lending to seize up.
For you to say, “Well, the average investor is temperamentally ill-equipped to accept the volatility” simultaneously avoids certain realities and obscures the fact that the folks selling this trash were literally trying to mis-price the risk right out of the market.
As a banker, I’d think you’d have to admit that the re-pricing of that risk effect is having especially vicious consequences right now: The self same “crappy assets” scenario writ large. [/quote]
I agree that the entire finance system is driven by trust. But here’s an obvious fact: There’s been too much trust placed in various parts of the system. Consequently, risk has been trading at a steep discount for 15 years. Now that the risk is real, right in front of our eyes, it trades at the premium it should have many years back. Put another way, the risk premium across almost all assets has been too small for many years. Now the risk premium is reasserting itself. Although painful in the short term, this is a good thing for the long term.
Where the rating agencies are concerned… again, like equity purchasers, anyone who buys securities blindly based on a rating agency’s assessment of a security’s strength is begging for trouble. (That’s part of the whole problem!) There’s been too much “outsourcing” of analysis over the last 20 years. People – and institutions (like banks!) – have to make their own judgments regarding the securities they invest in. This will probably mean higher risk premiums and lower valuations going forward. But, again, this is a good thing.
So, yeah, these are particularly perilous times. And it’s moderately – although not considerably – worse than I would have thought. But, like securities and the economy, life is volatile. It’s best to accept that fact and work it into your game plan. Whether you’re an individual or a business. To paraphrase Ronald Reagan: “Trust… but for God’s sake verify as well.” There’s been too much trusting and not enough verifying. That’s changing. As it should.
