Risky Business (Part 4)

MF Global made a mistake. But when things went wrong, they compounded their error by doubling down on troubled sovereign debt.

It’s similar to two of the biggest failures of 2007 and 2008: Bear Stearns added to their losing residential mortgage positions; Lehman added to losing commercial mortgages. In each case the company’s leveraged capital was then wiped out by adverse market moves.

This brings us to the fourth lesson of MF Global. Courage is necessary in investing. But don’t have the courage of your convictions. Have the courage of your calculations. Don’t form convictions from intuition. Intuition may lead you in a profitable direction, but investing without examining the fundamentals is like placing a bet in a poker game without looking at your cards.

Intuition doesn’t disclose the fundamentals of a stock or bond. Those are based on economics, on finance, on business principles, and on math. Once you’ve done the research and have formed a conclusion from the facts, act on it, even if the crowd disagrees. You are neither right nor wrong for being contrary. You are right if your reasoning and calculations show you to be right.

In the investing world, courage becomes a critical virtue after adequate knowledge and tested judgment are at hand. And experience tells us that while leverage kills, excessive leverage kills excessively quickly. That’s a lesson that no one can afford to miss.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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