Sometimes well meaning people refuse to see what is right in front of them. I have a friend who is very involved with the stock market and who spends a considerable time each day studying both market trends and details of individual companies. Five years ago, right before the full onset of the financial crisis, this guy invested in Citibank. I recall discussing with him whether or not it made sense to put further money into banks in view of all the problems arising from mortgages etc. His response was that the high dividend paid by Citibank would act as a support for the stock; there could be problems, he told me, but the dividend would prevent the stock price from falling very far. When I asked what would happen if Citibank cut the dividend, he responded with great assurance that Citibank would NEVER cut the dividend. He told me that such a dividend cut would greatly undermine the credibility of the Citibank management and would disappoint too many of the shareholders; it just won't happen was his refrain. Of course, in retrospect, we all know what happened. Citibank did indeed cut the dividend; it now pays less than one-thousandth of what it use to distribute. The stock price fell by about 99% even after the federal bailout. Five years later, the stock price is still around only 10% of where it was back then.
So how could this happen? I don't mean how did the Citibank debacle come about, but rather how could an intelligent investor get something like this so wrong when all the signs of impending doom for Citibank were there in front of him. The answer is that he made a mistake that most people do: he assumed that the past predicts the future. This is a widespread problem. Look for example at all those economists who predict what the economy will do. So long as the economy is moving in one direction, these people are pretty good at coming close to the actual results. When the economy changes direction, however, most of the economists don't even come close with their predictions. Another cause of what happened is the assumption by many people that they have more insight or power to control events than they actually do. In 1914, World War I began despite the lack of any desire on either side to commence hostilities; instead, what happened was that each move by the combatants brought on a countermove from the other side which could not be stopped. The leaders were powerless to prevent the conflict. A third cause is that some people do not understand that there are factors which are outside their purview but which could dramatically change the outcome. A belief that Citibank cannot cut the dividend because it would upset shareholders ignore the fact that the government could require such a cut as a condition of any assistance.
My point has nothing to do with Citibank or its dividend; that is just an illustration. My concern is that many people fail to face reality in deciding how to proceed. Instead, they act on the basis of half-baked impressions or even blatant misconceptions. Others refuse to act because they are conditioned not to believe what is in front of them. Just think about it. We have a government that says that continued deficit spending is not a problem; we will just continue borrowing all that we need to spend. But what happens when no one will lend to us? We have a government that pulled all troops out of Iraq without making any real attempt to reach a satisfactory agreement with that country to permit a stabilizing force to remain. But what happens when the terrorist forces return? We have a government that rushed through a major reorganization of the entire healthcare system of the nation so as not to consider the full impact of the changes. But what happens when that reorganization finally kicks in and millions lose coverage despite copious promises to the contrary?
I am not going to go down the entire list. People everywhere need to face the hard reality. America needs to understand what is actually happening; it is not enough to listen to the sugar coated message from the media that disguises more than it explains. The future of this country depends on this.
Today,
So how could this happen? I don't mean how did the Citibank debacle come about, but rather how could an intelligent investor get something like this so wrong when all the signs of impending doom for Citibank were there in front of him. The answer is that he made a mistake that most people do: he assumed that the past predicts the future. This is a widespread problem. Look for example at all those economists who predict what the economy will do. So long as the economy is moving in one direction, these people are pretty good at coming close to the actual results. When the economy changes direction, however, most of the economists don't even come close with their predictions. Another cause of what happened is the assumption by many people that they have more insight or power to control events than they actually do. In 1914, World War I began despite the lack of any desire on either side to commence hostilities; instead, what happened was that each move by the combatants brought on a countermove from the other side which could not be stopped. The leaders were powerless to prevent the conflict. A third cause is that some people do not understand that there are factors which are outside their purview but which could dramatically change the outcome. A belief that Citibank cannot cut the dividend because it would upset shareholders ignore the fact that the government could require such a cut as a condition of any assistance.
My point has nothing to do with Citibank or its dividend; that is just an illustration. My concern is that many people fail to face reality in deciding how to proceed. Instead, they act on the basis of half-baked impressions or even blatant misconceptions. Others refuse to act because they are conditioned not to believe what is in front of them. Just think about it. We have a government that says that continued deficit spending is not a problem; we will just continue borrowing all that we need to spend. But what happens when no one will lend to us? We have a government that pulled all troops out of Iraq without making any real attempt to reach a satisfactory agreement with that country to permit a stabilizing force to remain. But what happens when the terrorist forces return? We have a government that rushed through a major reorganization of the entire healthcare system of the nation so as not to consider the full impact of the changes. But what happens when that reorganization finally kicks in and millions lose coverage despite copious promises to the contrary?
I am not going to go down the entire list. People everywhere need to face the hard reality. America needs to understand what is actually happening; it is not enough to listen to the sugar coated message from the media that disguises more than it explains. The future of this country depends on this.
Today,
No comments:
Post a Comment