Like most investors, the experience of the financial crisis left an indelible mark on me as an evaluator of risk.
Like most investors, the experience of the financial crisis left an indelible mark on me as an evaluator of risk. Like most of you, I spent countless late-night hours reading, consuming the details of the crisis in real time as events unfolded. As I more intimately acquainted myself with vaguely understood terms like “credit default swap” and “collateralized debt obligation,” I vigorously directed my energies toward grasping the true scope of what was unfolding, and more important, what the official reaction would be.Unbeknownst to me was that experience would lead me to a completely new philosophy of counterparty risk, money, savings, wealth, and diversification. And after the immediate volatility had subsided, I did an autopsy on all my mistakes before and during the crisis, big and small. The biggest question I had to personally answer to myself is why I didn’t see it coming. At what point during that period were the warning signs so glaring that I should have been better prepared for what was approaching?After a few years of reflection, I am convinced that I should have seen it all coming, after the failure of the auction rate preferred market. The moment when these supposedly riskless investments – often used by investors to hold short-term cash – became completely illiquid, I should have known something big was coming. What one day was considered one of the safest instruments around was the next a completely bid-free, frozen market. To this very day – over five years later – 100 billion of those dollars are still tied up in auction rates. This blatant miss has driven me to follow current financial events, searching for that proverbial canary in the coal mine in today’s market environment.