Nine lessons from Lehman Brothers …

This past September 15th marked the 10th anniversary of the collapse of the iconic Wall Street investment bank, Lehman Brothers … after 158 years in business.

While there were several notable events which heralded the arrival of the greatest financial crisis since the Great Depression of 1929 …

… Lehman’s failure can arguably be considered the “shot heard around the world”.

As recounted in David Stockman’s epic tome, The Great Deformation, the guys in charge of the Federal Reserve and U.S. Treasury at the time, Ben Bernanke and Hank Paulson, proclaimed …

… “the financial system had been stricken by a deadly ‘contagion’ that had come out of nowhere and threatened a chain reaction of financial failures that would end in cataclysm.”

Apparently, Bernanke and Paulson weren’t followers of Robert Kiyosaki or Peter Schiff.

Because both Kiyosaki and Schiff appeared on national television warning people … that in spite of all the rosy economic reports, there was BIG time trouble brewing.

In fact, in this now infamous interview with Wolf Blitzer on CNNKiyosaki specifically warned about a Lehman Brothers collapse.

And in this contentious TV appearance, Peter Schiff was mocked by well-known economist, Art Laffer, for his passionate concerns about the dangerous proliferation of sub-prime mortgages.

Of course, Kiyosaki and Schiff both turned out to be right.  But as you may have noticed, they’re not on financial TV too often any more.

We’re guessing it’s because their viewpoints don’t fit the Wall Street “sunshine” narrative.

That’s why we make it a habit to get together with these guys … and others … who aren’t singing from the Wall Street hymnal.

Meanwhile, it’s hard to believe Lehman collapsed 10 years ago.

There are Millennials now well into their business and investing careers who were just in high school back then … and have no real recollection of what happened or why.

So just as Americans commemorate the anniversaries of tragic events such as Pearl Harbor and 9/11 to honor heroes, mourn victims, and remember important lessons …

… perhaps the anniversary of the fall of Lehman is a good time to consider what can and should be learned from economic policy gone bad.

“Those who fail to remember history are doomed to repeat it.” 
– George Santayana

We’re certainly NOT mourning the loss of Lehman.  Extinction is a healthy part of the cleansing process when cancerous enterprises infect a financial system.

And there’s probably an argument to be made that Goldman Sachs, AIG, and other foolish actors should have been allowed to fail too.

After all, when you look at how and why they got into trouble, to bail them out is essentially absolving them of the consequences of their reckless behavior.

Worse, it creates moral hazard … enticing Wall Street gamblers to continue to take big chances with their clients’ savings …

… knowing they keep all the upside but can push the downside to Main Street, both directly and indirectly through government bailout.

And as many real estate investors discovered the hard way, Wall Street’s gambling addiction absolutely impacts our Main Street investing.

Real estate didn’t cause the Great Financial Crisis … it was a victim of it.

Of course, the crisis also created fabulous opportunities for the aware and prepared.  There’s ALWAYS a bright side for the aware and prepared.

Investors like Kiyosaki and his real estate guy, Ken McElroy, made fortunes buying up bargains in the wake of the crash.

It’s usually the smart money that cleans up messes made by dumb money.

But we’re not here for a post-mortem on the 2008 financial crisis.  We’ve covered that extensively and you can find those episodes and blog posts in our archives.

Today is all about facing the future empowered with important lessons from the past …

Lesson #1:  Listen to all points of view with an open mind. 

Be mindful of normalcy bias, confirmation bias, echo chambers, and of course, sales agenda.

When the downside is left out of the discussion, you’ll end up with potentially disastrous blind spots.

But if all you see is doom and gloom, you don’t act.  And that’s bad too.

Lesson #2:  Study and think for yourself. 

Your financial future is too important to rely solely upon the Cliff’s notes and conclusions of financial pundits.

There are plenty of understandable investments, including our obvious favorite … real estate.  There’s no reason to abdicate the responsibility of understanding to others.

Sure, you can delegate the work of investing to others.  But not the understanding.

YOUR financial education is important, whether you get your hands dirty with the deals or not.  So make financial education a priority.

Lesson #3:  It’s never as good as it seems … and it’s never as bad as it seems.

It’s easy to get lazy in a boom … and paralyzed in a bust …  so keep looking for opportunities and keep your money working … in both economic sunshine and rain.

Lesson #4:  Take what the market gives you.

The market’s bigger than you are, so you can’t make demands.  It’s going to do what it’s going to do.  And it will change.

So when the world changes, you’ll need to adapt.

Resist the temptation to doggedly adhere to a now less effective strategy simply by taking on excessive risk … or reducing your return on investment targets.

There are almost always alternative opportunities you can move to.

Sure, it takes time and effort to learn new niches.  But so does recovering from a bad deal, or earning back lost opportunity from putting your portfolio in sleep mode until your preferred niche comes back to life.

Lesson #5:  Cash reserves aren’t idle. 

They’re actively providing insurance coverage for a liquidity crisis.  That’s worth something.  Think of the lost opportunity cost as an insurance premium.

So no matter how hot your niche is, be cautious of being over-invested.  If you think having cash reserves is expensive, try being illiquid when credit markets seize up.

Besides, it’s no fun staring at a market full of bargains, but without any purchasing power left.  You never know when the market’s going to have a BIG sale.

(That’s another reason why we LOVE syndication.  When YOU don’t have the resources to capitalize on bargains, you can always find investors who do.)

Lesson #6:  The economy and the financial system are NOT the same thing.

There’s a big difference between economic indicators … and the strength and stability of the financial system.

Study BOTH for clues about opportunities and risks.  In the boom leading up to the financial crisis, the economy was HOT.  But the financial system was frail.

Sound familiar?  It should.  History may not repeat itself, but it often rhymes.

Lesson #7:  Defense wins championships. 

The old sports adage very much applies to investing.

Billionaire stock investor Warren Buffet says Rule #1 is, “Don’t lose money” and rule #2 is, “Remember Rule #1”.

Billionaire real estate investor Sam Zell says a secret to his success is his skill at understanding the DOWN side.

Remember, there’s ALWAYS a downside.  Ignoring it doesn’t make it go away.  And if you don’t see it, it just means you’re not seeing the while picture.  Get experienced eyes on the deal to help you.

Lesson #8:  You can’t make a profit on property you don’t own. 

If you fail to buy property because of fear … or you lose a property because of greed … you’re not going to grow your portfolio or achieve your financial goals.

So yes, look at the downside.  But then look for ways to mitigate it.

When you’re done, weigh the upside against the downside … compare it to other opportunities concurrently available … and if it looks good, do it.

Over-thinking can be just as bad as not thinking.

Lesson #9:  Never over-expose your portfolio to any one deal … no matter how good it looks.

Firewall sections of your portfolio through entity structuring, selective and restrictive use of personal guarantees, and syndication.

As you can see, there are MANY lessons to gleaned from reflecting on financial history … and listening to smart people with diverse perspectives, experiences and expertise.

Until next time … good investing!


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