The Rise of Policy

Trading is dead. Long live policy.

Over the past few years we’ve seen the results of trading on the global economy. The trading mentality encouraged the big banks to relax their credit standards because they could always sell loans on the secondary market. The trading mentality caused buyout firms to pay ever-higher prices for ever-more questionable deals. The trading mentality caused Goldman to engineer a hybrid bond with the “leftovers” on its mortgage desk that ultimately cost it $650 million.

For years the trader has reigned supreme. Buy assets, package them, and sell them. That’s been the business model. Buy low, sell high. But we can’t all be traders. Someone has to own (and use) the assets. That owner has to have a policy.

An investment policy needs to specify what kind of return the owners are seeking, and what kind of risk they can handle, before any kind of asset is bought. It’s not enough that something is cheap. It needs to be part of the buyer’s investment universe. Otherwise, it’s unsafe at any price.

In an economy, there has to be an end buyer for every asset. If the traders extract all the value along the way, there’s nothing left for the final owners. That’s a problem.

Trading always seems to make sense, until it doesn’t. But long-term investors know that if an investment makes sense, it has to make sense for the long run. Sensible policy is a way to be sure of this.

Douglas R. Tengdin, CFA
Chief Investment Officer
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