The 3Ls That Matter

We recently passed the 5-year anniversary of the fall of Lehman Brothers, which in many ways was the watershed moment of the financial crisis. If you have any interest in what happens in a financial crisis, I recommend the movie “Too Big to Fail” as it is informative, entertaining and shocking – like a good movie should be.

But the reality of what happened 5 years ago, and the lessons learned and not learned since then, are worthy of all the media attention this infamous birthday has brought. I was proud to be a part of the “celebration” when Investment News asked me to be part of a special report on what financial advisors experienced and learned from being on the hot seat back in 2008. I was not only managing private accounts back then (as I do now), but I was about one month into my tenure as the lead manager of an alternative-style mutual fund.

I can say two things about that: First, what a way to get started running a mutual fund! Second, that experience strengthened my already-strong commitment to the concept of hedged investing. That is, I believe strongly that every investment portfolio should have a “trap door” to run through when markets turn ugly as they did in 2008, early 2009…but eerily not since that time (barring a brief 19% correction in the S&P 500 in 2011 that most investors probably forgot about already).

So, this week’s message is simply to group together three L-words that remind us of what spikes and crashes markets, and keeps us in the appropriate frame of mind, lest we forget the crisis that gripped our minds and money 5 short years ago:

LIQUIDITY – That is, the ease of exchanging money for securities, or vice versa. The ability to transact without unexpected delays or hurdles. The Fed has been providing a lot of it, and based on this week’s announcements, is neither stopping nor slowing its pace of doing so.

LEVERAGE – When you invest a dollar but borrow more to attempt to make a greater impact from your investment. The problem is, many investors, professional and otherwise, don’t know when to stop. Nor do banks and brokerage firms, based on what some of their balance sheets looked like in 2007.

LEHMAN – What happens when a good thing (liquidity), becomes too much of a good thing (leverage), and no one notices for a while until…

Click here to read my Investment News interview called “Leverage is What Pops the Bubble,” part of a great series of short interviews conducted by Investment News and published this week.

© Sungarden Investment Management

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