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May 2010

A Matter of Trust

By: Don Edwards, CFA

I recently attended the CFA Institute’s Annual Conference in Boston.  Once a year, investment professionals from all over the world gather to hear discussions from a host of world renowned speakers that range from Noble Laureates to thought provoking authors covering a wide range of industry issues.  A common theme from this year’s conference involved the loss of trust by the investing public toward the financial industry in the aftermath of the recent global financial crisis.  While we will hopefully cover a wide range of investment related topics in this newsletter in the years to come, I wanted to talk in this first issue about the matter of trust and how we as an industry can do a better job in the future than we have done in the past.

Trust is an essential element in a free market economy.  Without it, an economy such as ours stops working, which is essentially what happened during the fall of 2008 and the spring of 2009.  This loss of trust was entirely justified as the runaway financial sector seemingly forgot what its function was and evolved into the production of self serving products that served no function other than to enrich their creators.  While we cannot forget that the desire for profits is the engine that drives our economy, we also cannot forget that profits at any cost has the unintended effect of encouraging unabated risk taking that can have dire consequences.

Many of the mistakes made over the past twenty years involved using excessive leverage.  While borrowing money to make investments is perfectly acceptable, there comes a point in which doing this turns investing into pure speculation.  It is human nature that successful speculation, even when the success comes from pure chance, leads to even more risky speculation.  Left unchecked, this leads to an entire segment of our economy that has no support in reality and is nothing more than a bubble waiting to burst.  I have been in this industry long enough to hear the words, “This time it’s different” applied to tech stocks, real estate, housing, mortgages, and currently, gold.  Successful investment fundamentals do not change and never will.  It is an unfortunate reality that when these bubbles burst we all pay the price, even if we were not among the ones that were helping to inflate the bubble.

It is my opinion that those of us that make our living in the financial and investment industries must never forget that providing successful outcomes for our clients is really the only thing that matters at the end of the day.  This opinion is shared by everyone that works at Wabash Capital.  There is plenty of money to be made by listening to what it is that our clients want.  The capital markets will always involve risk and will always include head scratching weeks and months, but we don’t need to make things worse by taking more risk than is needed simply to generate more profits.  Hopefully other firms on Wall Street will come to the same conclusion we have and realize that successful clients produce successful companies.