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Pride comes before the fall

January 1, 2012

Even if you are paid 100s of millions you still can get it wrong.

I have been reading a lot about the financial crisis of 2008 that has put our economy in its current state. There was a time where it was very uncertain if any of the largest Wall Street investment firms were going to survive.

How could some of the smartest people in finance driven our economy to this point? Why were all of their balance sheets filled with toxic assets of mortgages bundled, repackaged and repackaged again?

I believe it came down to pride and greed. The major players in the investment banks thought they had outsmarted the market. The core as far as I can tell was the belief that home prices would continue to increase and that you could take a wide variety of mortgages with questionable rationale and put them together to make a very safe mortgage package.

For a couple of years, the major investment banks made billions by repackaging and selling all types of mortgages. Numerous traders from a variety of banks were receiving multimillion dollar bonuses. All of this was based on some faulty assumptions.

Individuals at the largest banks did not plan for this to explode. I believe they thought they had outsmarted the business cycle; they thought they figured out how to continually make more money without having the risk of losing it.

Looking back this is obviously wrong, but it was not at the time. The same thing happened with the dot com bubble of the late 1990s early 2000s. It is just a matter of time before it happens again. People get a certain level of pride where they feel they can continue to do something even after it stops making sense.

What can we learn from the carnage of our national economy the past couple of years? First, pride can lead to the destruction of you and your wealth. There are many times when someone has a “can’t lose money” investment for you. Whether it is a new product or a new strategy to beat the market, it usually requires you to focus on something that is very narrow or requires a large part of your investment.

Even when something sounds good, be sure to do your due diligence. Visit with others outside the situation to get their views. Read all you can from reputable sources to see if it is a legit opportunity.

Finally, diversify your savings. Make sure you do not have everything in one place, such as a company stock. For the short term this can make you rich, but over time, just like investors in Lehman Brothers and Pets.com, you have the possibility to lose all your money.

Pride does not only affect your investments and savings, but also your ability to produce income. If you have been successful in the past it is easy to sit back on your achievements and hope to ride that in the future. It is easy to think you know what it takes to be successful in your field of work. It is easy to rationalize that your past success will guarantee future success.

The system does not work like this anymore. If you are employed by a large organization it is important to show how you add value to the company, every day, even if you have been doing it for decades before. This proof of value is what keeps you employed.

Every day people in a variety of careers reach the top and then fall. Whether it was a moral mistake, or they just made poor business decisions, it usually comes back to pride.

This is not only true in our day, but also was true in the Old Testament in the Bible. The shortest book of the Old Testament is Obadiah. In this book, Obadiah warns the Edomites that they need to change. They can no longer afford to assume that because of their forts they cannot be overtaken. They can no longer assume that they will be able to gouge the prices on goods they trade with neighboring countries. They can no longer use these excuses to justify their superiority.

Obadiah pretty much sums it up when he warns them their pride will come in their downfall.  Now, more than 2,000 years later, pride continues to be the downfall of many individuals’ and companies’ savings and income-producing ability. Take a step back and look at yourself and your investments. If you are becoming too proud, humble yourself and start to change your direction.

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