The CFA Society Chicago book club met for their monthly meeting on June 16, 2015 to discuss “The Billion Dollar Mistake” by Stephen Weiss. Mr. Weiss brings a wealth of knowledge and experience to the table as he has spent nearly 25 years on Wall Street working at Lehman Brothers, SAC Capital, and Salomon Brothers. Coincidentally, he was booked on Flight 93 for a 9/11/01 departure though decided to postpone the trip to focus on pressing work at Lehman. The event was a turning point in his life where he left Wall Street to move out west and start a hedge fund. This is where he began thinking about his next phase in life and writing this book. At the end of the day, a mistake is a mistake, whether it is a billion dollars, a million, or a buck. This book presents several different case studies which can help us minimize the number of our future mistakes. The book also provides several 101 type lessons in finance to help explain the various case studies. The case studies involve the ponzi scheme of Madoff, AIG’s deviation from its core business, Aubrey McClendon’s excessive leverage at Chesapeake Energy, and activist investor Ackman’s divergence from his investment discipline. To sum up a few of the key takeaways, we have put together the following bullets:
- Never let your passion override your sense of discipline. Always perform your due diligence and remember that times, facts, and investment scenarios are constantly changing.
- Be careful of rushing into a market that is falling fast. Let the knife fall. It is better to fully understand the investment rather than impulsively jumping in.
- Insider buying and selling must be carefully analyzed. Understand the context and motivation for the transaction. Insider buying isn’t always a buy signal.
- Leveraging your portfolio can enhance your returns, but never over leverage to the point where you don’t have the necessary collateral to meet your margin requirements.
- Know the investment discipline established by your manager and ensure they stick to their mandate. Venturing outside their area of expertise leads to style drift and potential losses.
- Short selling can be a dangerous strategy. Remember that the market has an upward bias and going against it is similar to trying to beat the house.
- Rarely does a fall in stock price equal an opportunity. Prices move in response to new information resulting in a very efficient market.
- Beware outsized returns. They almost always indicate excessive risk. Be sure you are willing and able to take on the risk, otherwise stay conservative.
- Don’t just diversify across asset classes; consider diversifying across investment managers which can lead to increased risk mitigation.
July 21, 2015: On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future by Karen Elliott House
*(NOTE: Those who attend the July Book Club meeting will receive a free copy of “Superpower: Three Choices for America’s Role in the World” by Ian Bremmer)
August 18, 2015: Superpower: Three Choices for America’s Role in the World by Ian Bremmer
*(NOTE: Author Douglas Sisterson is attending the PDDARI meeting which takes place just before the book club meeting on 8/18. He will be discussing his book “How to Change Minds About Our Changing Climate”.
September 15, 2015: The New Cold War? Religious Nationalism Confronts the Secular State by Mark Juergensmeyer
October 20, 2015: TBD
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