Jeremy Siegel is the author of one of my favorite investing books, “Stocks for the Long Run
If you’re not interested in macroeconomics then the only interesting part will be the Bear Stearns discussion.
The part I found most interesting is the comparison of Bear Stearns and Long Term Capital Management at about the 7 minute point. Talking about mortgage-backed securities, Siegel says that Bear Stearns:
“Thought this stuff was great, they were buying it all the way down, with leverage…. It looked like a double down strategy on the part of Bear Stearns….
The truth is, had they had the liquidity to hold on, the Bear Stearns positions might have turned out to be very profitable.
Just like Long Term Capital Management ten years ago, had they been able to hold on, those positions became profitable.”
For those unfamiliar with the story of Long Term Capital Management, you can read about it here.
The lesson that I take from both Bear Stearns and Long Term Capital Management is that you need to retain enough liquidity to withstand a temporary drop in your portfolio. It doesn’t help to be right in the long run if you have to liquidate before you get there.
Or as the famous quote says, “The market can stay irrational longer than you can stay solvent.”
Or as Keynes would say, “In the long run, we are all dead.”
[…] Jeremy Siegel indicates, if LTCM had not leveraged to the extent it did it may have had sufficient liquidity to weather the […]