Luck, Leverage and Theft in the Markets – Mama knows

So you’ve seen the media hype from the socialist journalist middle classes who take every opportunity to stick it to the bankers – Fred the Shred, Dick Fuld – “Greedy *ankers” - the story that is pure porn in the business pages these days! But do you believe it?

Arrogance to blame
Mamamarkets doesn’t know the individuals but she knows the type - extreme hubris and upper percentile intelligence is a pre-requisite on the floors of the city – success and environment invariably lead to a glitzy marble sheen of arrogance.

But is that arrogance enough to cause global meltdown on the scale we are seeing? Don’t you believe it and don’t believe the hypocrisy of the fawning city journalist – promoted by snippets of planted knowledge over the years – now pushed to the fore and pretending to be the voice of the people – the arrogant “greedy bankers” still paying his kids school fees and holiday in St. Barts.

The fault is ours – yes you and I - and every single one of us that sat on our new B&B sofa in our lateral space apartment boasting of the 100% growth in our house value over the last three years and the 25% returns on our stock portfolio.

Ask yourselves the question – How do you think YOU made those returns? You must know it’s impossible with cash. If you lent $100 to anyone how much would they pay you for the use of those funds – 5% yes; 10% maybe; 15% unlikely unless they are worried they can’t pay back the principal – 25% - come on get a life – they aren’t going to pay it back.

So how did your fund manager, your advisor or your stock portfolio perform so well? There are 3 ways; 2 legitimate and 1 Madoff - let’s ignore the latter because a hustle is a hustle whether that be short-changing in the supermarket or short changing at the Board table.

Legitimate 1: – you got lucky and bought Google at a buck – well done – now just don’t expect to get lucky again and again. Even Buffet failed this year.

Legitimate 2: You invest in normal market products with yields of 10% and you leverage it 4 times meaning a gross return of 40% and net 20% (assuming interest rates at 5%). Does this look risky to you? Well it is and you still only make 20% a year. Remember who pays you 10% a year when the market is 5%?

Ignorance no defence
Don’t plead ignorance now please and pretend you didn’t understand leverage – you bought a house didn’t you?

So yes blame every investor and shareholder including yourself. Investment banks have targeted returns every year of over 25% return on capital - impossible but what’s the worst that could happen if you worked there – you didn’t make it – lost the lot, blew up the bank and lost your job. If you didn’t try and gave back the capital you lost your job anyway and the next sharp shooting arrogant master of the universe rolled straight in from Harvard. Investors and shareholders demanded 25% returns – Which as we have already established takes luck, leverage or theft.

Who were these investors and shareholders? – That was You and Mama here with an arrogance to match that of Mr Fulds and Mr Goodwin but at least they got to keep the house and a pension to pay for it I guess.

Mama knows her markets
Mamamarkets