Ben Bernanke had a tough job last Friday. His speech had to both calm the capital markets as well as remind people they needed to take responsibility for their own finances. In hindsight, it was probably obvious he was going to say the Federal Reserve stood ready to support the financial markets with liquidity when necessary. Was he really ever going to say the opposite? But the most important aspect of his speech was that people needed to be held accountable for their own actions. We see this every time there is a bubble in one part of the economy or another. Remember Alan Greenspan's "irrational exuberance" and "conundrum" comments? They were in essence gentle reminders to people to… ahem… take a reality check. It's a lesson we value investors learnt long ago, and frankly we wished everyone else would wake up and took note of it.

Value investing is about not overpaying for assets, not overstretching yourself to buy them, and selling out before "mad cow disease" (=bull run not based on fundamentals) strikes. Out of all the investment strategies available, I fail to see why so many people don't invest based on value criteria. Instead, they trade based on rumour and momentum, and then look for someone to blame when they get burnt. As they inevitably do, because people who trade based on rumour and momentum have to watch the market continuously, and must continuously look for signs that the market is about to turn against them. There is certainly money to be made in markets this way, but there is also a lot to be lost this way.


Ben Bernanke did well to tell people the Federal Reserve wasn't there to bail out overleveraged positions. Amen! If anything, the Federal Reserve is there to whack those speculators over the head, as part of its role to maintain stability in the financial system, be it price stability or stability in the sustainability of the economic cycle. If I was Bernanke, I might have had harsher words for those who not only bought sub-prime mortgages (which have every reason, so that poorer US families can also afford their own homes), but also packaged them neatly into securities, then sold them, then leveraged them to the hilt. Bernanke is far more the diplomat, but quite clearly his message to all those "mad cow" sufferers is: serves you right!

Now, let's get back to sensible investing based on strong fundamentals (which many economies in the world are currently enjoying) and let's hope the hot money from the speculators who punted big on sub-prime mortgages either join the fray or stay out altogether. We'll all sleep better for it.

Mark Laudi

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