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Perishable Thoughts —
Lessons From Bernard Baruch

Jim Prevor’s Perishable Pundit, September 16, 2008

With the Dow Jones Industrial Average down over 500 points on Monday and The New York Times headlining Wall Street in Worst Loss Since 2001, we thought it appropriate to contemplate the words of a noted financier:

“If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.”

Bernard Mannes Baruch
Quoted in the St. Louis Post-Dispatch
June 21st, 1965 (Pg. 5A) (Note, published the day after he died)

Although the St. Louis Dispatch online archives only go as far back as 1988, the quote is included in numerous compilations including:

Great Jewish Quotations: By Jews and About Jews"
By Alfred J. Kolatch
Published by Jonathan David Company, Inc., 1996
Pg. 38

The Pundit Poppa went to Baruch College, a part of The City University of New York, so we have always had a special interest in Mr. Baruch. The school was named after Bernard M. Baruch, who was not only a financial wizard becoming a millionaire on Wall Street before he was 30 — and that was back when a million bucks was the equivalent of about $25 million today — but also a prominent counselor to Presidents, from Woodrow Wilson on to John F. Kennedy.

Baruch coined the term “cold war,” made the cover of Time magazine three times and, famously, knew to exit the market before the Great Crash of 1929 as stocks had become too popular. Here is how Baruch described the situation:

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

Yet we elected to highlight Baruch’s quote about information because we think that in the government’s decision not to bail out the venerable Lehman Brothers leading both to its bankruptcy and the plunge in the stock market, we can finally see, if not exactly the end to the financial distress of the markets, at least the beginning of the end.

The truth is that there is plenty of money out there. What has been missing is good information to allow legitimate business decisions.

Lehman Brothers could not raise additional capital because nobody could evaluate the value of its portfolio with any degree of assurance.

This is principally due to the fact that government bailouts of companies such as Bear Stearns and Fannie Mae and Freddie Mac have kept hundreds of billions of dollars of assets that eventually will need to be liquidated off the market. This artificial restraint on supply has served to confuse the market as to what the true value of financial assets actually are.

The best possible outcome is if assets of Lehman Brothers are quickly auctioned, thus establishing public values. This will likely cause another round of write-offs as financial assets are “Marked-to-Market,” but such public definition will start to give investors the information they need to judge relative values and thus elect entry price points for investments.

Intelligent investors know Mr. Baruch’s point well, so when they do not have adequate information, they lose faith in their own ability to make judgments and thus sit on their hands and buy nothing.

Markets have to clear before they start to rise, and the dissemination of accurate valuations of financial assets is the key ingredient necessary for markets to clear on real estate and financial instruments.

*****

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