The Secrets of Successful Investing
Two recent headlines encapsulate the current financial wreck—the mortgage crisis that has ensnared the markets across the globe and may threaten the economy of the entire world:
OVER THEIR HEADS: Small Investors, Too, Get Nailed by Arcane Trades
—The Wall Street Journal, August 14, 2007
INVESTORS MULL HOW TO GET OUT OF HEDGE FUNDS: Market Turmoil Highlights Notoriously Tricky Rules for Redeeming Shares.
—The Wall Street Journal, August 15, 2007
The words “over their heads” and “tricky” caught my attention.
Investors are being hosed these days by Wall Street sharpies that have come up with highly complex, tricky and incomprehensible schemes that are over everyone’s head—including those that dreamed them up.
You and I are being hosed by these sharpies, too. They cried “WOLF”—just as they did in the 1980 Savings & Loan Crisis—and the federal government and central banks have injected billions into the markets. As taxpayers, we are bailing out the greedy, incompetent bastards.
If you read nothing else this week or this month (or this year), commit to memory the following advice from Peter Lynch, the retired wizard of Fidelity Investments:
Never invest in any idea you can’t illustrate with a crayon.
A Quick History of the Subprime Mortgage Mess
In the August 15 edition of The Wall Street Journal, Aaron Lucchetti and Serena Ng reported the spark that ignited the worldwide economic conflagration that we are seeing today:
In 2000, Standard & Poor’s made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a “piggyback,” where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.
While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America’s home-loan industry: a boom in “subprime” mortgages taken out by buyers with weak credit.