Learning From The Financial Crisis by Ed

While there is bad news all over about the financial crisis, there is something to learn from it all. Although this mess is so big that 3 men in black i.e. Henry Paulson, Ben Bernanke and Timothy Geithner have more than their hands full and sleepless night putting out fire across the financial firestorm, the lessons I think are quite simple.

Don’t be Greedy

It was greed that spark this firestorm in the first place. Greed by those on Wall Street, including financial giants like Lehman Brothers, AIG and the similar companies. The greed was relatively easy money on the returns of their investment.

Management of the above companies were also greedy since they are rewarded with bonuses and stock options when the company’s bottom line met or exceeded. What better way than to jump onto a band wagon of easy returns.

Don’t Over Leverage

The other thing is over leveraging their financial positions. Leverage is a double edge sword. If you are leveraged 10 to 1, when the markets goes up 1%, you make 10%. When the markets go down 1%, you lose 10%.

What happens when greed and over leveraging hits you at the wrong time? You have to sell! In the case of financial institution like AIG, they are forced to sell their most valuable assets. For an individual, you might have to liquidate you home, your car, anything that is worth something.

You have to pay back what you borrow. There is no two ways about it. In a sense, this type of investing is no different from gambling. Anyway, that is another post for another time. For now, learn from the financial crisis. While the present crisis is far from over, you can be sure that it will happen again!