Take a Pause, Relax, and Get Rejuvenated

The big news last week was three banking leaders coming out and saying their banks are profitable or will be profitable, or do not need to go TARPing again.

First, I am surprised that all of these three leaders came out within the same time frame.

Second, do we really think these leaders have left any credibility in what they say?

Third, from a different viewpoint, weren’t these the very same folks who have been part of this ongoing lack of confidence or credit issue?

Do you get confused, or panicky, or flustered, or overwhelmed with all the discussions, proclamations, dooms-day-scenario, advice, suggestions, recommendation, etc. Well I sometime do! I am human! Before you make a final call, all you need to do is take a step back, pause for a moment, and relax. Mistake has already been made and making a prompt decision may help you in short term. It will give you instant gratification that you cut your losses. But if you don’t think about why you did that in first place, it is highly likely that you will do the same mistake again. For individual investors like us, this is where significance of a well defined process and discipline to execute it comes into play. It will help us remove the emotional part of decision making.

Recently, I have been involved in an engineering problem solving situation which has its root cause at inter-disciplinary aspects (design, engineering, reliability, quality, and manufacturability). While problem solving is part of any typical profession, I brought this up here to put this in context of proclamations of above banking leaders.

A great product design, great engineering to make it work in a large system, meets reliability and quality metrics, and can be manufactured cost effectively. Isn’t that every corporation wants? Well yes! But there is always a “but”. Can this great design be manufactured in extremely high volume at a robust sustainable level? So while it can be manufactured and keeps the customers happy, can it really be a profitable preposition? The small statistical variability’s within individual discipline gets ignored. But when these small variability statistics get combined into a larger system, it is really a killer. As per “Theory of Constraints”, the individual variability is acting as constraints in ability to have a robust sustainability.

If we take a step back, then we can interpret statements from these banking leaders as a confidence building choreography to calm down the equity markets. What has changed in terms of economy, in terms of jobs, and in terms to growth? At least I do not see any visible improvement? Do you folks feel or see improvement? Just in one month time period, how can these leaders proclaim partial victory? However, they do seem to have succeeded in temporarily putting some brakes. After insisting on many public forums that dividends are safe, they eventually suspended or cut their dividends.

Their profitability is constrained by economy, jobs, and lack of growth engine. Their business model or operational procedures are just not sustainable for long term profitability. The “but” in their profitability proclamation is to ignore the write downs and asset devaluation.

The message is we are capable of prudent decision making process; we do it in our daily lives at work place and at home. We should do the same with our investment portfolios. Don’t get distracted by media. Don’t get tempted to fall in value trap. We all make mistakes, learn from it, promise yourself not to repeat, and move on…..

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