Friday, January 25, 2008

Goldman Envy

"Our envy of others devours us most of all."
-Alexander Solzhenitsyn

The Romans called it invidia. The Catholic Church has made it the sixth deadly sin. It's part of the reason that Cain killed Abel and Kevin Spacey killed Gwyneth Paltrow in Se7ven.

Three days ago, The Wall Street Journal published a short, but interesting article about how other banks attempts to be more like Goldman Sachs contributed to their current financial troubles. This reminded me of how important it ignore the crowd.

Merrill Lynch and Citigroup shouldn't have tried to out-Goldman Goldman. It was doomed to fail. They should have instead focused on their strengths. I remember a strategy class that I took in school where we examined a case study involving Harley-Davidson. The company was trying to decide whether to enter the performance bike market(a growing market) or to continue chugging along with its familiar and iconic cruisers. The class was divided into several groups and each one made a compelling case for entering or shying away from the new market. At the end of class, the professor reminded us that when facing such a decision, we should ask ourselves, "is this the right move my company?" There is no reason to be in a market just because its growing. Is anyone making money? Or are we just trying to keep up with the Joneses?

Investment decisions are no difference. It's called personal finance for a reason. Financial goals and the means to accomplish them vary from person to person. Asset allocation should be tailored to your specific goals, age, and risk tolerance levels. The same goes for investment styles. Some people can make money trading, others can't. Some can make money on penny stocks; most lose their shirt.

I am not going to summarily knock message boards or social-networking stock sites. There are plenty of well-intentioned people who post to them. They can be very educational. However, there are also predators(Michael Lewis's excellent book, Next, details the exploits of Johnathan Lebed, a 15-year old stock manipulator who settled with the SEC regarding several pump and dump schemes he masterminded). There are also just plain stupid or innocent people, lacking malice, who unwittingly spread rumors or give bad information. The same goes for blogs, including this one.

When listening to investment advice, I suggest that you follow Ronald Reagan's maxim, "trust, but verify." It will save you a lot of money.

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