In Search of the Perfect Investment

The movie is called Inside Job:

The official writeup.

Inside Job is the first film to expose the shocking truth behind the economic crisis of 2008. The global financial meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs. Through extensive research and interviews with major financial insiders, politicians and journalists, Inside Job traces the rise of a rogue industry and unveils the corrosive relationships which have corrupted politics, regulation and academia. Narrated by Matt Damon.

Harry’s comments after seeing the movie/documentary last night:

I lived through the economic crisis of 2008. I lost money in it. Lots of money.

I was stupid. I shelved good judgment and substituted hope. Booms do that to you.

As I watch this movie portraying the Wall Street “villains” taking their millions, with not one in jail, I wonder if they are the “villains” the movie portrays or just a bunch of ordinary people (like me), who also substituted hope.

Heck, it worked. They bought, they bundled, they sold. There was, for several years, always a bigger fool (like me or a pension fund) willing to pony up a few bucks for the triple-A rated stuff they were selling.

Wall Street had everyone snookered. Heck, Goldman Sachs, Citigroup (and others) snookered me into buying stuff they were selling. Like fellow investors, I saw the dancing dollars that Wall Street dangled. I ignored the risks going forward for the returns going backwards — past performance was huge. Private equity funds, leveraged buyout funds, hedged derivatives. Funds I through V had done spectacularly. It was a privilege to be allowed into Fund VI. I had to beg to get in. And with me firmly in, it now nosedived. Who knew.

I can’t speak to the ethics of the billions in bonuses Wall Street execs took home. They’re all detailed in the movie. I can’t speak to the incredible success that Wall Street has had in taking over Washington. Think of Washington as Wall Street’s ultimate derivative play. In the end, it wasn’t AIG that backed all those successful gambles Goldman Sachs, Morgan Stanley and others took against sub-prime securitzed mortgages. It was the Federal Government. It was Wall Street’s best investment ever — the 3,000 lobbyists and countless millions that it spent to convince Washington that it do Wall Street’s biding — to de-regulate, to protect it, and ultimately, to bail it out.

Washington only acts when someone thrusts a crisis in its face — e.g. Hitler invades Poland or the Japanese bomb Pearl Harbor — or the imminent meltdown of the world’s financial system. The ultimate brilliance is to be able to orchesstrate a crisis. Wall Street did that brilliantly with the economic crisis 2008.

We can fantasize what would have happened if we had left the capitalist system do what it’s meant to do — let Goldman Sachs, Morgan Stanley, Bear Stearns, Citigroup and Bank of America fail and declare bankruptcy. Personally, I think the bits and pieces of these firms would have been re-organized into smaller, more nimble entities. And today’s world of finance would have been a different, healthier place. But that’s not the way it happened. With ex-Goldman Sachs employees running Treasury and the Federal Reserve and screaming fire, we got the fire engines in and printed dollar bills to put out the flames.

Still, you should watch this movie. As a investor, you’ll learn what I’ve been preaching in this column for several years: Don’t trust Wall Street. Above all, you should not buy any of the products it sells. As I’ve explained, Wall Street firms are product machines like every other company in the U.S. It designs new black jeans. If they sell at full retail, great. If not, they’ll sell somewhere at a discount. The only difference betwen clothing makers and Wall Street is that, with Wall Street, you can also lose your shirt. And they won’t care less. After all, you’re “sophisticated.” It’s your money. If you’re foolish enough to believe them (and the rating agencies they pay), then you deserve to lose your money.

Play the movie every time they call and ask in their deep earnest voices, “How are you Mister Newton?” And then, when you’ve heard their pitch, politely say “No, thank you.”

The real culpability for the economic crisis of 2008 lies with the regulators — everyone from Greenspan on down. They knew of liar loans, of ninja loans (no income, no job), of no-doc loans. They could see that millions of Americans would never be able to pay their housing loans back. They knew that instititions like pension funds that bought the loans in bundles called securitization were going to suffer and worker pensions would be hurt. The regulators knew the system of paying the rating agencies by Wall Street was a shame, designed to mislead the pension funds and other buyers of the garbage securitized sub-prime loans. Heck, articles and books were written. The regulators — including all the ones at the key players at the Federal Reserve — were visited by dozens of analysts and hedge fund managers and told what was happening out there in the real world. But, in the end, they choose not to listen. You and I can pontificate on the reasons, some of which might include:

1. A belief that everyone in America deserves to own a house, irrespective of their income.

2. A belief in zero government regulation and people being intelligent enough to police their own actions.

3. A belief in economists and the mumbo-jumbo garbage they espouse. Politicians actually believed that economists knew of what they spoke. Trust me, they didn’t and they don’t. I have a degree in that dismal science. I studied it. The world works in strange and mysterious ways. But it’s not the way economists (or Wall Street analysts, for that matter) would lead you to believe.

Which brings me to my second takeaway — the first one being don’t buy the crap Wall Street creates and sells. The second is you can’t trust regulators. Given half a chance, Wall Street will sell you garbage. The regulators won’t protect you. Item: Investors are still stuck with $100 billion of auction rate preferred securities which they can’t sell. All the owners of $100 billion of ARPs got told was that ARPs were as liquid as money market funds. But they weren’t. Neither were the AAA-rated packages of sub-prime bonds worth an AAA-rating. (More likely, an F, for failure.)

As an economic person — investor, buyer, borrower, candlestick maker — you’re on your own.

When in doubt, stay out.

No is a wonderful word. Practice saying it every day.

Buying tips:

1. Don’t buy packing tape unless it’s Scotch and made by 3M. All the others are garbage — cheap, nasty and don’t stick.

2. The best pima cotton short-sleeve shirts are now available from Lands End. The cotton is soft as a baby’s bottom, or some other silly analog. Click Lands End.

3. The best travel dress shirts are made by Paul Fredericks. They’re called non-iron, 100% cotton. I prefer their Trim Fit shirts. For Paul Frederics non-iron.

4. Renting a car?Give Priceline a low bid. And watch the car renters come crawling for your cheap business. Alternatively, many organizations — like AAA, AARP, etc. — will give you a six digit code which, if entered into the web site of car renters, will save you  money. The AAA’s number is 152622. It’s called a PC code, whatever that means.

Soap in the bed works. Jim Costello returned from a trip. For three nights he had leg cramps. Then he put a bar of soap in his bed. Bingo, the next night, no cramps.

Jim says happily, “The soap worked. Thank you.”

Finally, someone learned something useful from this column.

Moral question: If I’m not interested in investing, may I still meet with the principals for comic relief?

Time to go traveling. In Africa, they warned us of the baboons.

And elephants who are powerful and irritable.

Anyone for an African safari? Or perhaps a nice golf game?

A nice golf game.

A golfer has been slicing off the tee on every hole.

He asks his Irish caddy if he has noticed any obvious reasons for his poor tee shots, to which the caddy replies:

“Aye, there’s a piece of shyt on the end of your driver. “

The golfer picks up his driver and cleans the club face, at which point the caddy says:

“No, the other end.”

Harry Newton who wonders about how tennis is affecting his feet. Suddenly, all my shoes are too small.  Tennis is flattening my arches, lengthening my feet. Once I was an 11, then an 11.5, then a 12, now a 12.5, especially in Nike which run small.

Richard Russell worries about the market. From his last night’s newsletter — nice words:

Where are we now? My studies tell me that we are still in a primary bull market. True, there is a good deal of deterioration going on, but I see nothing to suggest that the bull market is actually over.