More Thoughts on 'The End of the Financial World as We Know It' 7 comments
Nadav Manham
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This two-part essay has been receiving a lot of attention. Whitney Tilson said the following about it in an email:
STOP THE PRESSES!!! RUN, don't walk, to read these two articles by Michael Lewis and David Einhorn, two of the best writers and thinkers about the financial crisis.
I read the essay twice, both to learn what the two thinkers think, and as an exercise in evaluating Einhorn as a money manager. I've written before that how well an investor writes can offer clues into how well he invests. It may seem like a marginal activity for a money manager selector to focus on (along with tracking the conspicuous consumption habits of investors), and it's not the main thing I look at, but the logic of active investor selection, especially hedge fund manager selection, is ruthless:
1) Active investment managers are very expensive
2) There is a wide performance gap between the best ones, the mediocre, and the worst
3) In most cases, low-cost passive investment alternatives are widely available
4) Unless you manage to invest in the top ten percent of active managers (or even better if you pay someone like me or a fund of funds to select for you), your money and efforts spent on active manager selection rather than passive investing will have gone to waste.
Therefore, the manager selector must look hard at anything and everything that could be of use, both art and science.
With that self-justification out of the way, I was less impressed with the Lewis/Einhorn essay than Whitney Tilson. Although I agree with them that there is a lot wrong with the financial world that needs to be fixed, I don't think they proved that the various cited "causes" of the current crisis in fact caused the current crisis. Yes, Wall Street is too short-term oriented, but that's been true for a long time (and Japan's vaunted long-term thinking of the 1980s, celebrated in airport books everywhere, did not prevent it from experiencing a crisis of its own). Yes, the SEC is a revolving door between the public and private sector, but it's been that way since Ambassador Kennedy. Yes, the ratings agencies face perverse incentives, but that's always been true.
I'd be interested to hear your thoughts. If you read the essay, force yourself to forget about the fact that one of the co-authors is a very successful and wealthy hedge fund manager.
P.S. By the way, I must take points off from Einhorn for his choice of collaborators. Michael Lewis may be the Tolstoy of narrative business non-fiction, but as an investment thinker I would not rank him as highly. Check out this takedown of Warren Buffett in the New Republic from 1992--17 years and about $38 billion (of Buffett net worth) ago. Here is how Buffett biographer Roger Lowenstein described the article and Buffett's reaction to it:
In "Saint Warren: Wall Street's Fallen Angel," Lewis charged Buffett with a series of investing and ethical flaws so all-encompassing that an unknowing subscriber might have supposed that he was reading of one of the century's great swindlers -- and one of its great failures, to boot. Lewis took the Efficient Market Theory as gospel and dismissed Buffett's career as a run of lucky coin flips. That aside, "Fallen Angel" was rife with actual errors.
Buffett was livid over the Lewis piece. Morey Bernstein, the author of The Search for Bridey Murphy and a Ben Graham devotee who had known Buffett casually, wrote Buffett a sympathetic note, damning Lewis's article, apparently in more profane terms. Buffett -- ever careful with words -- responded: "Morey -- Thanks for the empathy re the Michael Lewis piece. He is everything you say he is." (pp 404-405)
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This article has 7 comments:
And history shows that they are the only sure bet.
There is a reason that Buffet is winning at this game called Monopoly.
mast-economy.blogspot....
Look around at the ads that you see on Seeking Alpha and anywhere else talking about finance and investing... will you see a picture of an
very expensive active investment manager?
No, you'll see the smiling mug of Warren. Perfectly content with his 2008 portfolio that is now down 30-40% last year. In fact if you look closely at his face, you will notice that he is laughing. Why?
"I can't believe how easy this passive investing is."
TO: Good News Economist- However, you can't be completely passive with your investing even if you take more of a passive strategy. You should still do your homework...
Whether it's finding the best financial advisor, finding the best stocks for a long-term horizon, or doing due diligence on an alternative investment fund, you need to be somewhat active in your investments. If you're not you could get scammed like Madoff investors did.
At my site, I am trying to educate investors about being the smartest they can about investing and finding golden opportunities in the market.
2) From the essay:
"Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many."
BULLCRAP. Excess leverage/deregulation/... of policing/fannie mae and other market manipulations/governme... heavily advertising Efficient Market Hyposis. The dumb consumer does not escape culpability but does not control the nations economy. Congress does. There are endless example of 'legislating into thy own pocketbook' this last decade from Congress but specifically Senate Oversight Committees. Hey, got corruption? Where (wink wink)? You get the government you elect. American citizenship are slowly waking up as they have in other eras of depression. Google 'voter revolution'.
3) From the essay:
"These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it."
Great point but back to my point number 2, no?
4) On TARP and Financial Bailouts, the U.S. citizenship resoundingly said NO! Paulson IB buddies tied into Central Bank investments getting the funds and a portion of there further malinvestment would have been obvious to Congress IF THEY KNEW ECONOMICS like they are supposed to. Ron Paul is one guy, where's the rest? Oh yeah, our government has gottent so used to outsourcing it doesn't need to know the details. As to essay saying 'stock market fell anyways with TARP', it fell because of the lack of confidence, let's say confidence outright collapsed at that point, because the citizenship said NO! Outright Fascism has that funny way of destroying capatalist investment strategies.
5) From the essay:
"But as it happened, the banks took the taxpayer money and just sat on it."
What did Congress think they were going to do with it? Oh yeah, back to point 4 on Congress economically clueless. Back to point 2 on Senate No-versite and legislating into thy own pockets.
6) Not much in comment necessary on Warren Buffett and glad Buffett didn't offer up defensible position to that attack. Time will tell how his investments will pan out in the next four-five years.
jrs87sch, I totally agree with you...
Sorry I got the original Buffet link wrong...
mast-economy.blogspot....
about Buffet reading all day and how his strategy today is unchanged from 1974.
GNE
These two guys get the award for total arrogance.
On Jan 08 03:01 PM Good News Economist wrote:
>
> jrs87sch, I totally agree with you...
>
> Sorry I got the original Buffet link wrong...
> mast-economy.blogspot....
>
> about Buffet reading all day and how his strategy today is unchanged
> from 1974.
>
> GNE
>
>
Your points on the TARP are well taken, but did it ever cross your mind that the reason that there's been no inflation and no lending is that the banks were insolvent? In other words, Paulson helped out his buddies get by, knowing that our economy totally crashed in October 2008. I mean, if they have big negatives on the balance sheets and Uncle Paulson helps his buddies out at the expense of the American people, the sheets at the bank may only show minimal reserves.
The article should really be called, The End of the World as We Knew It.
People don't understand how serious our economic situation is, let alone that it will be almost impossible to correct the structure before an all-out collapse. Obama's stimulus plan would need to inject $1 trillion/month into the economy/consumers for the next decade to keep our quality of life at even current (depressed) levels. He'll collapse the government/dollar before the economy ever turns around.
BTW -- The markets... STAY AWAY. The only people who are trading are proxies for Paulson and Bernanke... There are ABSOLUTELY NO REASONS why ANY of these companies should be gaining based on their current fundamentals or future prospects. They are a shill for the U.S. Government, for appearances..