Value Investing News

Bloomberg reports that Standard & Poor's has "lowered credit ratings on capital notes of 13 structured investment vehicles and placed debt of 18 SIVs on negative outlook as the funds struggle to finance themselves."  In what seems to be the typical situation in today's world of high finance, a credit rating agency has downgraded risky investment vehicles just in time for those who lost money to see why they lost it, but too late to do anything about it.  If you will think back with me to the Enron debacle, you will recall that it was rating agencies' maintenence of investment-grade status for the company that allowed it to hobble around long enough to sap a little more equity out of investors before it collapsed.  This is not an isolated incident, as the ratings of other shaky vehicles have been downgraded in recent months after news of troubles was already in the marketplace.  Unless I misconstrue the purpose of S&P and Moody's (which I do not, as you will see from their respective business summaries here and here), the goal is to alert investors about potential problems with investment vehicles BEFORE those vehicles fall apart like gingerbread houses in the rain.

The primary purpose of the preceding paragraph is not to poke fun at the ratings agencies (like this sentence's goal was not originally to start most of the words with the letter "P") (though both seemed to accomplish those goals as a secondary consideration).  Instead, the purpose is to observe that, if you want to invest in something, there's no substitute for doing your own research and coming to your own conclusions.  The ratings agencies are staffed with highly educated and highly paid people who know how to analyze assets.  Structural considerations, however, seem to render them incapable of predicting catastrophe within a reasonable time before it occurs.  Perhaps Consumer Reports should go into the credit rating business.

In any case, before you invest in something, look at the financials.  Read the annual reports.  Look through the footnotes.  Then, if you do end up losing your money and guzzling malt liquor in the gutters of Wall Street instead of riding a chariot of gold to your penthouse office, at least you can tell your fellow gutter-dwellers that you did your best.  And, of course, sufficient research significantly decreases your odds of spending nights in the gutter - at the very least, it will help you avoid some mistakes.  How hard was it, for instance, at the height of the housing boom, to look at home builders' balances sheets and realize that the "inventory" line represented the market value of land and houses held for sale?  Land and houses that would inevitably be written down and then written down again as the rate of foreclosures inevitably went up as ARMs reset and investors fled the market.  Having seen that, how hard was it to then understand that the spectacular-looking balance sheets, which suggested that many of the builders were in a financial position to pay off all of their liabilities (current and long term) a couple of times over, were in fact dancing on a house of cards?  Not very hard, I'll submit.