Making Bad Investments in a Rising Market

“Your words are too hard,” said a Frenchwoman at last night’s soiree. We were celebrating the launch of our new financial magazine in France. The country is famously a graveyard for Anglo-Saxon capital. Businessmen from the United States or Britain invest millions…and usually lose it. And so the well-wishers and grave diggers were out last night, drinking champagne, and talking about the news:

“Wow…I can’t believe what is happening in world markets. And I can’t believe what is happening in the United States. To think that Congress wouldn’t pass the rescue bill! We’re on our way to a worldwide depression, for sure.

“You know…this must be the worst week in 50 years to launch a new financial magazine. Are you sure you know what you are doing…?”

Know what we are doing? Never. As near as we can tell – after 30 years of close study – the business world is a constant improvisation based on little more than guesswork, pluck and instinct. If something works, a good businessman keeps doing it – until it stops working.

How else to explain the disappearance of the whole investment banking industry – practically overnight? Ask any mother in the ’90s what she wished for her son and she’d say she wanted him to go into investment banking. That trade was a ticket to wealth and everybody knew it. During the ’90s…up until 2007…investment banking was probably the best-paid profession in the world. Whatever they were doing was working like gangbusters. So, they kept doing it…until they went broke.

As long-time Markets and Money sufferers already know, we are not really very interested in money or investing. What draws our attention is not the beastly subject but the strange beast himself – Homo sapiens economensis. So…we wonder what they were thinking…all those super- well educated, super-paid geniuses.

For example, Wachovia’s CEO appeared on Jim Cramer’s Mad Money show and whooped it up:

“We have a great future as an independent company,” said Robert Steel. “We’re also focused on very exciting prospects when we get things right going forward…” Two weeks later, the firm had lost 90% of its capital value and was hastily sold to Citigroup for $1 a share.

Now, the lawyers are circling…arguing that he intentionally misled investors. Maybe he did. Or maybe he just didn’t know what was going on. The investment banking industry drew in some of the world’s smartest people. But few of them seemed to have any idea what business they were really in – loading the world down with debt that couldn’t be repaid. Nor did they understand that they couldn’t continue to do for very much longer. Jimmy Cayne was playing bridge when Bear Stearns went down. When Lehman went bust, Dick Fuld, who was supposed to be so shrewd, was holding $1.2 billion worth of options on the shares.

The chat forums are exploding with angry comments: “These guys should go to jail,” they say. Probably some will. It is a virtue to help people make bad investments in a rising market. When the credit cycle turns, it is a crime.

Until tomorrow,

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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