Burt Malkiel, a professor of economics at Princeton University, made his name giving investors no-nonsense advice in best sellers such as "A Random Walk Down Wall Street."
He says investors and Wall Street traders need to remember some of those age-old investment philosophies, especially as the market digests difficult news like the Securities and Exchange Commission's civil fraud charges against Goldman Sachs Group Inc.
Malkiel discussed some of the issues in the market recently with The Associated Press:
Q. Were you surprised that the SEC went after Goldman Sachs?
A. I'm not surprised by it. It's kind of upsetting for me. I started my career as an investment banker. And I remember so well the senior partners at my firm would say, "We don't want to bring any underwriting to the market that we don't absolutely believe in. I want something that I could sell to my mother." Somehow, I'd kind of like to see a return to those old-fashioned ethics.
Q. Will financial reform legislation now before Congress help?
A. I'm sort of suspicious. I don't think the government can legislate morality. Smart people are always going to find some way around whatever regulations you've got.
Q. Derivatives, specifically those related to mortgages, are at the center of the Goldman case. Do these things really have any value for the average American?
A. Let's remember what these mortgage-backed securities actually accomplished. If it hadn't gone too far, (they were) very helpful for the average consumer. What this meant was that there was much more money available for mortgages. It wasn't simply that, once the bank had lent its own capital, it had to stop. The bank would lend its own capital, and then sell those mortgages to an investment bank, who would package them, and then the bank could lend again. We know all the problems that happened. But, had it not gone too far, it wasn't a bad thing. We believe in the American dream of owning a house. It wasn't a bad thing to have more money available for housing, and for student loans and so forth. So just remember, no doubt about it, this went too far, it was very damaging. But the general securitization and these derivative instruments, at least for a while, were very beneficial.
A. We're still recovering from the financial crisis and recession. What mistakes are investors still making?
The two biggest mistakes that people make are, one, not saving enough. Most people are doing very inadequate saving. A lot of people are not signing up for their company's 401(k), even though there is a match from the company. Many, many, many people. It's a staggeringly large number of people (who) simply put nothing into their 401(k). It's just spend, spend, spend. And when you finally come back and look at the stuff you bought, a lot of it, you might say to yourself, 'God, why did I buy that?' This is just crazy. That's mistake No. 1.
Q. What's No. 2?
A. I think mistake No. 2, for those who are investing, is an attempt to time the market. What we know about people is that they'll generally put money in the stock market when everybody is optimistic. And they will generally sell when the sky is falling. In fact, I had a radio interview, and one of the questions was, well "Gee, shouldn't you sell out when everyone is telling you how bad things are?" That's typically the bottom of the market.
Q. Can you think of an example?
A. More money went into equity mutual funds during the last quarter of 1999 and first quarter of 2000, during the height of the Internet bubble, than ever before. And in fact, it all went into the high-tech mutual funds. The value funds that were actually cheap were losing money. More money came out in the third quarter of 2002 than ever before, which turned out to be the bottom of the market, because everyone was pessimistic and everyone was selling. And, by God, it happened again in the last quarter of 2008, and the first quarter of 2009. The world was falling apart, who knew (what would happen)? You remember what the headlines were then. That's when more money came out than ever, ever before. And of course, in retrospect, that turned out to be the bottom of the market.
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