This WallStreet Journal article on hedging activities that have recently backfired at Morgan Stanley once again made me wonder how so many smart people can get so wrapped up into attempting to get something for nothing. Personally, I think this behavior is the equivalent of welfare in the corporate suite, the promotion of the idea that you can get a return without assuming any risk. This violates any lesson grandma tried to teach, and yet the elitist MBA crowd keeps on trying.
I love it when hedges backfire. I’m just not a fan of insuring investments. That’s what the return is for, as compensation for the risk you’re taking.
An analogy might be having an elite professional athlete take a bunch of morphine before he goes on the field, just in case he gets hurt. The problem is it isn’t healthy and arguably might cause the athlete to act even more recklessly than he otherwise might. I think that’s what happens in the financial markets when people put on hedges. They tend to act more recklessly because they don’t have a vested interest in the outcome. And, then I think, why did they make an investment in the first place, if they are just going to hedge against it? Just seems odd. Maybe if we require all Indy Car drivers to press on the brakes while they press on the gas, there will be fewer crashes.
I can’t quite put my finger on it, but I think the same thing about Credit Default Swaps. Something stinks about these “products”. Following the trading patterns on these investment vehicles has become the sophisticated tool du jour for the investment crowd; you’re just not educated if you don’t or can’t talk the CDS talk. In a sense, people are no longer even paying attention to the house they are buying, but the price for the insurance on that house, as an indicator of the health of the house. While it sounds intellectually consistent, it also sounds just plain stupid and needlessly complex, especially if you consider the fact that fast moving prices – up or down – in any market are always bound to attract naked speculators who don’t even know or care to know what a house is, but do like price volatility.