Sunday Morning Coffee


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.

8 Comments

  1. What you say is also true on a micro level and was well driven home in your recent post on MIC.

    My quest for a sophisticated, well-diversified portfolio exposed me to risks that I really didn’t understand (auction rate preferreds, currency fluctuations, contango, backwardation, etc.) That’s all probably fine for some people but I’ve decided not for me. If Rubin can’t control the risk, why do I think I can?

    I’m using this downturn to simplify my portfolio–stocks to capture trends and cash to smooth out the ride. I’ll manage my risk by adjusting the ratio, not by shorting the yaun, dabbling in mortgage-backed securities, or buying orange juice futures.

    Simple IS better and I’ve got to step away from the mouse. Thanks for the reminder.

    Reply
  2. Good points made Roger and 07:56.
    With all the apparant sophistication used by investors and traders in both stormy and calm markets, it’s good to know there are simpler ways to view the world and still feel like you have a “finger on the pulse” with a chance at similar long term success. Many times you point out that taking chances on various parts of the market is ok as long as you don’t be the farm on any particular aspect of a breakaway offense strategy. Reminds me of Mel Gibson’s advice to his sons in a particularly risky rescue scene in the movie Patriot: “aim small, miss small.

    Reply
  3. I think the few quotes from Rubin make me suspicious of the WSJ’s intent on the pasting they gave him, however, the blogosphere is certainly pounding on the former Clinton Treasury Secretary.

    With respect to Roger’s takeaway. I look at it more like someone asking me for financial advice in 2007. I told them about ETFs, showed them how to build a portfolio, steered them to information sources etc. And then they come back to me Mid Nov 2008 and and blame me since they “bought ETFs and lost money.”

    If you’re (Rubin’s) not responsible for the implementation and management, how can you shoulder so much blame for the collapse?

    Reply
  4. Venn data,

    A very good point; the disconnect between planning and execution can get pretty big 😉

    Reply
  5. The risk/rewards for a banker like Rubin were asymmetric. He would have lost more credibility with the financial community at that time if he had not taken risks to give investors “growth”. Now, that Citigroup has almost gone under, I would be surprised if he is still not a very rich man — with a lot of continued influence in government at that. The U.S.’s implementation of capitalism is heavily skewed towards risk-taking where the risk falls mainly on the individual investor.

    Reply
  6. I’m just hoping that the sages who are saying that this time is different than the great depression and the US is different than Japan are right and can manage their way through this. So far, we’ve got ourselves a roomful of Rubins.

    Reply
  7. Keep your shorts on, folks. We’re not done yet.

    R in NY

    Reply
  8. The town is similar to Hawi except the parking is not angled. But do they have a good ice cream shop?

    Reply

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Sunday Morning Coffee


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.

Submit a Comment

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WP-SpamFree by Pole Position Marketing