As the blow-ups of huge financial concerns make headlines, consider the following words of wisdom from Michael Lewitt of Hegemony Capital Management in a recent newsletter. To paraphrase Lewitt, the underlying problem causing today's woes is not a lack of financial savey, it is a mindset of making a quick buck by moving paper around rather than by actually producing something:
Finally, we made the point that too much economic activity in the United States was aimed at speculation rather than production. For example, the equity markets are increasingly dominated by quantitative investment strategies that are driven by considerations that are totally divorced from considerations of fundamental value. At the same time, the credit markets are increasingly utilized to finance change-of-control transactions for private equity firms that are done simply because low cost financing is available, not because a project is going to add to the productive capacity or capital account of the nation. As we wrote in that April issue, "[a]t some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes. This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results."
These changes cannot and will not be effected simply by legislative fiat. It is incumbent upon the gatekeepers of capital - the fiduciaries that make the decisions about allocating capital - to bring discipline to the system. This will require a rethinking of their priorities and a willingness to add to their investment calculus considerations that exceed their own narrow interests about short-term investment returns. Our system requires a new concept of fiduciary duty that encompasses systemic as well as single-firm interests, and that focuses to a greater degree on risk-adjusted returns than raw numerical returns. Obviously the forces that led to this weekend's events have been building for many years, and the changes needed to fix the system will not be made overnight. But we should not let this occasion pass to reflect on what has occurred.
You can find Lewitt's work at www.hcmmarketletter.com
