Chicken Little and the world of finance

Last week’s pace was frenetic, and for most of the time, I tried to get all the market shrillness out of my head. Talking to a friend over the telephone, we had a laugh about whether we would see a different world if we looked out the window, just because of the weekend that changed Wall Street—and the world’s financial markets—forever. Grass was the same kind of green, my lonely Acacia tree was still a tree as lovely as a poem, bugs were still great magnets for my young boys, and all in all, I was happy to note that the sky wasn’t falling on my head. Sure, some of the ricocheting bullets from this crisis will probably leave marks forever. Some may be losing their jobs, suffering deep gashes in their investment portfolios, losing their retirement money, and the list can go on. Some changes will, hopefully, stay for good. For example, I hope this crisis taught us to be more careful in choosing financial institutions. Size matters, yes, but more so the values of the management handling our money. However, since anyone’s batting average in choosing the perfect firm can never be perfect, being well-read, quick on your toes, and flexible can help minimize financial risks. Some recommend tuning out the media. Believe me, that was tempting even to me. But if you have your head on the sand, it’s not just your rear end that will get hit. Johnny Noe Ravalo, who is by the way now a managing director at the Bangko Sentral ng Pilipinas, said it very well: “The lesson is to stay calm, but vigilant. And reconsider whether we have chased returns too much,” he said. Mark Yu, director of the Chartered Financial Analysts of the Philippines, said diversifying and rebalancing portfolios regularly, and preparing for uncertainties by bolstering emergency funds should be the biggest lessons from the crisis. Makes sense. If you had ALL your savings in the stock market, you would be hopping mad too. Alijeffty Gonzales, managing director of ACG Advisors, taught me about this neat concept called residual risk, where pushing people to get ahead of the line when recovering funds in mutual funds, pre-need or insurance is foolish. The fact is, in case a company folds up, everyone gets an equal share because the funds will be divided over the number of investors. Not like in a bank run where the last man on the line gets little or none. Here, a wait-and-see attitude would be more beneficial, because if the company rights itself eventually, you wouldn’t have lost anything. Clearly, being informed and calm trumps acting out of fear. As we all know, the sky will never literally fall. Ask those who have gone through the 1997 financial crisis, or even the Great Depression.

6 Comments

hachiko | September 23, 2008 8:20 AM

Salve, survey here from CFA Institute for members to answer. Let's see if our answers tally :)

1. The primary cause of the subprime crisis was:

a. A normal correction of market excess and speculation in the real estate mortgage area.
b. A failure of regulation.
c. A serious breach of ethics and integrity.
d. All of the above.
e. Other (________)

2. Do you believe that financial institutions have fully and fairly disclosed the value of their assets?

a. Yes. b. No. c. Some have, some have not.

3. To what extent are the following participants to blame for the creation and magnitude of the subprime crisis? (rate from 1 to 5; 1 = Not at all to blame, 5 = Completely to blame)

- Individual real estate speculators who took out the loans in the first place.

- Mortgage underwriters and their misapplication of loan standards.

- Financial firms that engineered and proliferated highly structured mortgage-backed securities.

- Financial firms that hold these securities—often in off-balance-sheet structures—with inadequate risk and internal control systems.

- Credit rating agencies and careless or negligent ratings on mortgage-backed securities.

- Lax regulators and insufficient regulation of investment and banking institutions.

4. The level of governmental support through bailouts is:

a. Reasonable and necessary.
b. Should not have been done and should go no further.
c. Should go further in some cases in order to prevent greater collapse of markets.
d. Excessive and inappropriate; taxpayers should not assume losses of the financial sector.
e. Other (________)

Ghia | September 23, 2008 10:54 AM

I was telling my friends over the weekend that after a tumultuous week in the world financial markets last week, if we could all just chill and enjoy an ice cold beer. I know this isn't a good time to be celebrating....but rather take advantage of this time to relax, re assess our portfolio, re align our priorities, re do our budgets. We'll never know if the worst is yet to come. So we may have tighten our belts, bolster our emergency funds, cancel any planned vacations or purchase any item of a substantial amount. But when it comes to investing, we must not become like the chicken little who acted out of fear of an impending storm....and pray that we'll see the light at the end of the tunnel soon....

Salve | September 23, 2008 4:46 PM

hi hachiko! hahaha. katuwa ka talaga. will turn your comment into a blog post and have other people answer too! thanks!

Salve | September 23, 2008 4:48 PM

Ghia, exactly! Your post also got me wondering, how are people reacting to the global financial crisis? what strategies are they employing? or are they worrying about it all? hmm.

Aspiring Entrepreneur | September 23, 2008 5:18 PM

View my post on how I took adavantage on the recent hefty drops of the stock market ;)

Locationbridge | December 10, 2009 2:40 PM

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Chicken Little and the world of finance

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