Irresponsible Greed Is A Recipe For Disaster In Investing

My time as an investment advisor took place between 2000-2005. It coincided with the technology bubble and its subsequent collapse.

Upon hearing the news of two financial icons Lehman Brothers and Merrill Lynch filing for bankruptcy and being bought out respectively (and AIG. Wouldn't want to discriminate), it brought me back to those days.

In high times, greed generally gets the best of humans; especially those prone to deception. Back then the markets were driven by technology stocks and now it was mortgages.

When the bubble burst like an ugly balloon nearly ten years ago, needless to say many people were left crying and wondering how they could be so stupid. And when investors are upset they move to another stock broker, firm or bank.

It was no different for us. Although we were the beneficiaries since we literally had a conservative book. My senior partner at the time refused to jump on the tech craze citing wisely the commanding PE multiples, among other things, made no sense.

It seemed as though many of the incoming assets (or what was left of them) came from Merrill Lynch.

When we explored potential clients further, it was not uncommon to find out that Merrill advisors were encouraging investors (even the ones that lacked financial sophistication) to leverage their portfolios and borrow on margin to invest in tech stocks.

One of the first things you learn in investments is the dangers of leveraging. Everyone likes to see the potential returns from leveraging but often overlook the fact that it works in reverse.

Greed mixed in with deception in a rising market is like putting crushed garlic on oil in high heat on the stove. Not only does it splash it burns the garlic within seconds.

A sound investor will do two things: hold or buy low. Let the short sellers have their fun and then move in. Furthermore, it's best to let the markets purge themselves and avoid government bail outs which on the surface seem appropriate but in reality are damaging.

Now whether what happened with Merrill and Lehman is a symptom of a wider problems is for another debate.