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Pfizer Inc. Message Board

  • hotpanera2 hotpanera2 Apr 1, 2008 2:52 PM Flag

    The credit crunch was not foreseeable

    BUT that SOME unanticipated event could occur unexpectedly is and was very foreseeable. Diversified investors can almost always survive such unexpected disasters, average down when appropriate, collect dividends, profit from covered call premiums and come out well on the other side. It is the same huge leverage that killed the Bear Stearns hedge funds and ultimately Bear Stearns, Carlysle Capital and a bunch of other hedge funds, mortgage reits, etc. that resulted in massive losses for Superior Methods (not). Yes, in some periods there are no macro or micro debacles and huge gains are obtainable. But then come those pesky debacles appear out of the blue when leverage is absolutely deadly. Sure, if you have massive funds, or don't but are willing to risk all your assets, you can double down and HOPE that you'll recover before the next unexpected, unanticipated macro or micro debacle hits. Is this the way a retiree should be investing? There isn't the slightest doubt in my mind that the answer is a RESOUNDING NO. And I'm not saying that because of anything that happened in the last 6 months. It is what I said and would say no matter the investment climate. The risk of the unknown makes extreme leverage absolutely maniacal. Buying 20% of stock on margin or writing puts exercisable into 10-20% of financial assets is not what I'm talking about. 10:1 leverage is.

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    • How about some examples......

    • Actually the collapse of sub-prime mortgages & all the elaborate derivatives thereof was foreseen by many savvy investors, who have profited wildly richly from the financial collapse, either by similarly complex synthetic shorts on the housing market or somewhat less richly by simple shorts of home builder & most at risk bank & lender stocks.

      Greenspan was wrong about a national housing bust & those wiser than he have reaped gigantic rewards. Basic rules of lending were thrown by the boards & many knew a whirlwind was being sowed.

      • 3 Replies to alliebaba2006
      • > Actually the collapse of sub-prime mortgages & all the elaborate derivatives thereof was foreseen by many savvy investor

        Goldman seems to have gotten on the other side of the trade rather quickly last Fall, avoiding the problems of many other financial institutions.

      • You're right that some saw it coming. But many smart people didn't, and I would not call anybody a bad investor just because they didn't. My point is that EVEN assuming for the sake of argument that the credit crunch should not have been foreseen, that doesn't mean it was a 100-year storm and excessive leverage would be fine in the other 99 years. ALL kinds of unknowables can occur, serious geopolitical events, major drug recalls, and all kinds of things that can't even be named until they occur. The error was not the failure to foresee the credit crunch, which most did not and yet haven't lost their shirt. The failure was not understanding that the likelihood of SOME, albeit unknowable, macro or micro debacle was far from insignificant and when it occurs the effect of huge leverage is devastating.

      • That's right.

        Everyone should, each year, download and read (at least the summary portion of) a copy of the BIZ Annual Report.

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