Caution, Balance, And Gambling "Conservatives"

“…everybody knows that most people who trade in the market lose money at it in the end.” Benjamin Graham

Once upon a time caution was considered to be a good thing. Now it seems as though the word has been excised from the dictionary. Caution and balance seem to be nonexistent in the corporate world and in the political world. Unfortunately this affects my world.

Once upon a time gambling was considered to be a bad thing. Now it seems to be the means for greedy people who already own more than most of us to try to own even more. And when they win the rest of us lose, and when they lose the rest of us lose. I’m part of a game that I don’t even want to play.

Once upon a time the word conservative meant “marked by moderation or caution.” Now it seems to mean radical (“marked by a considerable departure from the usual or traditional”) gambler (“to play a game for money or property, to bet on an uncertain outcome.”)

These changes have caused great loss and hardship for many.

Once upon a time insurance companies and banks were cautious entities. They did not gamble. It was illegal for them to do so.

From The Intelligent Investor by Benjamin Graham (page 60):

Our argument against the purchase of corporate bonds and preferred stocks by the defensive investor needs now to be balanced by an argument in favor of placing some part of his funds in high-grade common stocks. In the old days such a proposal was little short of heresy. All common stocks were considered more or less risky and therefore unsuited for a conservative portfolio. This concept was and remains embedded in the state laws governing the investments of trust funds (unless the instrument provides to the contrary) and also those of savings banks and life insurance companies, which in many states may not hold common stocks.

That is from the 1949 edition. Mr. Graham also states that this conservative approach was also mandated by law for university endowment funds. How things have changed. (Also, his argument against the purchase of corporate bonds and preferred stocks had to do with a preference for U.S. Savings Bonds at the time. He did not dislike corporate bonds and preferred stocks, he simply saw that at the time U.S. Savings Bonds paid higher interest and provided more safety.)

From The Intelligent Investor by Benjamin Graham (page 12):

Investment requires and presupposes a margin of safety to protect against adverse developments. In market trading, as in most other forms of speculation, there is no real margin for error; you are either right or wrong, and if wrong you lose money. Consequently, even if we believed that the ordinary intelligent reader could learn to make money by trading in the market, we should send him elsewhere for his instruction. But everybody knows that most people who trade in the market lose money at it in the end. The people who persist in trying it are either (a) unintelligent, or (b) willing to lose money for the fun of the game, or (c) gifted with some uncommon and incommunicable talent. In any case they are not investors.

Like I said, the changes that I mentioned earlier have caused great loss and hardship for many. However, I have no sympathy for those at the top of AIG.

From AIG top staff struggle financially: report by Ajay Kamalakaran:

Top executives at troubled insurer American International Group have been struggling financially after taking personal losses in the wake of the near-collapse of the company last year, AIG's chief executive Robert Benmosche told the Wall Street Journal in an interview.

The losses were incurred when the executives' cash bonuses were cut and unvested stock salary and stock options that were previously earned were rendered almost worthless after AIG's near-failure in September 2008, the paper said.

Benmosche told the paper that 10 people reporting directly to him lost a combined $168 million in prior years' pay since the insurer was bailed out by the U.S. government last year.

Five other employees at the company's financial-products division, who are unwinding its derivative trades, lost $88 million in prior pay, the paper cited Benmosche as saying.

"Many people think there was no penalty for the executives at AIG when it did poorly and that they need longer-term compensation so they don't benefit from taking inordinate amounts of risk," Benmosche told the paper.

"But if you look at where they've been this year, they've been pretty much wiped out," the paper quoted Benmosche as saying. "And we have to recognize that we're not 100 percent sure about what the value of AIG will be in the future."

How can this be? At an insurance company? Insurance is “a means of guaranteeing protection or safety.” Not only did the “top staff” at AIG fail their customers, they have failed themselves.

Again I ask, how can this be? Let’s do some basic arithmetic. 168 divided by 10 is 16.8. 88 divided by 5 is 17.6. So 10 people lost 16.8 million dollars each. And 5 people lost 17.6 million dollars each. What the hell kind of money were these people making when business was good? And the bigger question, why is all of that money gone now? (“… they've been pretty much wiped out…"). Compared to these people I make very little money. I invest heavily in stocks. Like everyone else my portfolio suffered when the stock market collapsed recently. However, I was not wiped out. Again. How can this be? Perhaps it is because I try to be an intelligent investor and not a greedy gambler. I have also never whined to the Wall Street Journal, or anyone for that matter, about my losses.

At AIG we have “unintelligent” people, “willing to lose money for the fun of the game.” Definitely not “gifted with some uncommon and incommunicable talent.” Clearly “they are not investors.” AIG's chief executive Robert Benmosche seems to think that they deserve our sympathy. They are not getting any from me. Instead I ask a question. Why do they still work at AIG?

Allow me to shift gears here. Did George W. Bush show any moderation and caution when he decided to invade Afghanistan and Iraq? Or was he gambling? Making a high stakes bet using other people's lives, and other people's money?

Allow me to shift gears again. I see a parallel with this issue to the current debate on global warming. Those who side with Sarah Palin, believing in “climategate” and denying global warming seem to be gambling on our future. The stakes are very high. Shouldn’t we at the very least be truly conservative here? What is wrong with a little moderation and caution when it comes to the future of the planet? Could we please put more intelligence into this debate and remove the greed component? Sarah Palin’s either/or argument seems incredibly dangerous. What if she is wrong? Once again I feel like I’m part of a game that I don’t even want to play.