Mark Hebner / Mary Brunson

IFA's Quote of the Week - 35 (Jeremy J. Siegel)

"The current financial crisis calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment."

Jeremy J. Siegel, The Wall Street Journal, “The Resilience of American Finance”, 9/16/08

Fallen Market Perspectives

The recent turmoil in the financial markets has sparked a great deal of debate over who’s to blame and who’s to pay. Storied investment banks, brokerage houses, mortgage backers and insurers have tumbled like a house of cards seemingly as if struck by a faint breath of air.

Politicians have pontificated as to where to lay the blame for the current credit crisis that has led to the unraveling of three of the five largest investment banks. They and their wide assortment of selected mouthpieces work furiously to spread the message of how they alone can save Wall Street, taxpayers, and the U.S. economy.

Despite the frenzied pace at which hordes of media hounds seek to offer their views of events du jour, IFA thinks a more moderate view should be aired and heeded. In search of temperance to combat the race for ratings, we were struck by two articles which cast a far more circumspect view on the events that have transpired, and how investors can best view their investments earmarked for the long-term.

In a September 15, 2008 Wall Street Journal article, Brent Arends offers instructions for navigating emotions in the wake of the market’s recent bloodletting. Arends recommends that investors begin their perspective-building plan by, first rolling up their windows, and shouting:  

“ohmygad-ohmygad-ohmygad!”  

This initial, if not essential, catharsis can lead the way to real perspective regarding long-term investments.

In pondering how we can thrive in a post-Lehman world, Arends reminds us of previous shockwaves sent through the markets, including the 1994 collapse of Barings Bank, the implosion of Long Term Capital Management, and the devastation that we all felt when the Trade Towers fell to the ground. Yes, we have been here before, and while it is frightening in the moment, Arends advises that “the people who stay at the table and don’t make stupid moves here are going to be the ones who make the money in the years ahead.”

Further perspective comes to us from Jeremy Siegel, finance professor at Wharton and author of Stocks for the Long Run. In his September 16, 2008 Wall Street Journal article titled “The Resilience of American Finance”, Siegel states that “the recent turmoil does not mean the financial industry will shrink dramatically. In fact, the current crisis could well lead to an increase in the demand for financial services, as the world grapples with the need for new financial instruments, new risk management techniques, and the increasing complexity of the financial world.”

Siegel rightly points out that the demise of three of the five largest investment banks are the result of leveraged risk, leading us to discern that the perceived fragility of the system is not as tenuous as the media would have us believe. “Their demise was caused by bad risk management, and a failure to understand the high risks of an overheated real-estate market, the root cause of our current problems,” Siegel continued.

Siegel casts light on the real culprits of the crisis. He states “the lion's share of the blame must go to the heads of the financial firms that issued and held these flawed credit instruments and then, in many cases, "doubled down" by buying more when their price was falling.”

Siegel suggests that the crisis is drawing to an end. “Despite the recent turmoil, there is good evidence that the worst is over, especially for the commercial banks with access to Federal Reserve credit,” he states.     

If we have reached a turning point in the credit debacle, IFA deeply hopes that the surviving investment banks will carry away a cautionary lesson about leverage and risk—one which IFA has practiced since it began its financial services practice which now stands at $1 billion and 1,700 clients strong—No Leverage, No Opacity, No Short-Selling.

IFA fully understands the hazards of excessive risk and leverage and has written frequently about their dangers, their inappropriateness, and how they are utterly unnecessary in any portfolio—individual or institutional.

IFA welcomes the opportunity to fulfill the need that has been revealed by the current economic crisis which Siegel claims “calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment.” With 80 years of risk and return data, complete transparency, risk/return optimization and 20 globally diversified Index Portfolios that invest in 17,000 stocks from 40 different countries, IFA is poised to provide professional investment advice to every investor who never again wants to feel the need to roll up the windows to scream.