Interview Part 5
Lesson from the Global Economic Crisis
Policy and Investment Lessons

1. What policy lessons can countries learn from the global economic crisis?

For the political leadership, the lessons are:

1. Lack of regulation is as bad as over-regulation. Although I believe governments should not regulate free market choices, I also believe they should regulate to protect investors against conflict of interests and negligence by investment bankers. Regulations should also ensure full transparency and disclosures and should effectively penalize violators. To be more specific, I mean investment banking firms who knowingly sold investments to their clients and later betted against them without informing the same clients; those who invested in fraudulent funds without proper due diligence on behalf of their clients; and rating agencies that mis-rated subprime junk derivatives as grade A assets.

2. Short-term policy orientation can have adverse affect in the long-term with huge price to pay. The deficit spending, multiple stimulus and bailout programs fall into this category

3. The US and other political leaders should not allow private interest groups to dictate national economic policies and if they are too powerful and can influence the election, leaders can mitigate the conflict of interest by including equal number of independent advisors and opposing schools of thought in the advisory and policy committees

4. Insanity is defined as doing the same thing and expecting different results. Hiring the same people who got us into the economic recession in the first place or hiring those who did not foresee the financial crisis to design the recovery policies is not the right solution. Most of the economic advisors to Bush and Obama did not see the crisis until it was too late and some of them participated in the policies that led to the crisis in the first place. Recently Obama was forced to change his economic advisors, but the question is whether the US can afford another trial and error approach to solving the crisis, be it the Democrats or the Republicans

5. Countries that quit producing real products, spend more than they produce, lag in education, burden their middle class with higher taxes, and continue to import billions from other countries, bail out failed businesses and reward bad behavior instead of investing in good businesses, will eventually lose their leadership and wealth.

6. Countries pay a big price not only for their wrong economic policies, but also for wrong foreign policies. Countries that allow foreign lobbies, special interest groups or extreme nationalist movements to dominate their foreign policies by becoming active participants in international conflicts will end up creating more enemies and wasting their valuable resources in defending their own security. Countries that try to spread their ideologies by force, be it religion, socialism, capitalism, democracy or something else, will be overwhelmed by the human and economic cost of conflicts. Those countries will lag behind other countries that are focusing on developing their economies and advancing their interests via global partnerships and trade. The global economic landscape is not like it was after World War II; at that time, the US had no real competition in rebuilding war-destroyed European and Asian countries. With the new global knowledge and global competition, if you take your eye off the economic ball someone else will pick it up. This lesson is not only for the Americans but also for the Chinese, Russians, Indians, Middle East and countries all over the world.

7. Globalization of markets, competition, partnerships and risks should carry far more weight in the designing of strategic national development plans. It is not enough to think about government budgets anymore, you need to build your economy and businesses for global markets and competition. The challenge is that CEOs now think like global investors, while the political leadership thinks like local civil servants. A new model for socioeconomic development with global partnerships is emerging. Getting the right policies to attract and develop talented labor, capital and diversify the income sources will determine the prosperity and wealth of the people of each nation.

2. What lessons can investors learn from the global financial crisis?

For the investors, the lessons are:

1. Be careful of whose advice and what advice you buy, even if it is for free, my advice included. I was in Geneva in 2009 giving a keynote speech to a group of the some of the wealthiest families in the world along with their top investment bankers and advisors. Many of them lost money because they could not foresee the crisis. You will be more surprised to learn how many people lost money  because they invested with fraudulent investment schemes, such as that of Bernard Madoff. Just Google the list of Madoff's victims and you will see that the list includes the largest investment banks and funds around the globe. That should tell you a lot about the soundness of the current investment strategies and risk management practices in the industry. Most of them treated their investments as black box with no real due diligence. Madoff's Ponzi scheme defrauded about $65 billion from top investment firms and lasted more than 15 years.

2. Economists and financial analysts are not much better; most of them are academic experts, statisticians or quantitative analysts, with little or no real-life business experience. Very few have strong knowledge of the business drivers and qualitative forces that drive investment and operational decisions. Without that knowledge, you cannot accurately determine the performance of assets and markets

3. Investment by imitation is not an investment strategy. So do not invest in an asset just because everyone else is doing so or because the largest investment bank has invested in it. When you decide to buy the advice of anyone, buy it based on the merit of the advice not on who is the source. Those are the ABC of critical thinking and sound decision making.

4. Informed investors can make money in any environment including recessions. More millionaires were made during the Great Depression in the US than any other time, and more millionaires will be made globally because of this crisis than ever before. In my opinion, the markets now are full of undervalued assets that can make you rich; but you have to be very careful of which ones to pick.

5. The adage that knowledge is power is true. In the world of financial markets and investments, knowledge is the ultimate power. Educate yourself before you invest. If you know something that others don't, you will make a lot of money.

6. Success in the investment world is all about decision-making. Wrong decisions are based on lack of information or misinformation. If you are an investor or a CEO, try not to invest in an asset, a project or a product line, if you are not sure that the information is complete and accurate. Making the right investment decision requires a detailed set of information about macro and microeconomics conditions, markets, sectors, industries, companies, qualitative and quantitative analysis, fundamental and technical analysis, behavioral finance and risk management. Unfortunately, a substantial part of the information available in the media is just noise and the advice of many analysts is based on either incomplete decision-making frameworks or contaminated with biases and misinformation. The ability to distinguish between valid and invalid assumptions, more important vs. less important information, and to control the emotions of fear and greed during the ups and downs of markets are keys to the success of the investor. Because there are many uncontrollable variables, no one can forecast the future with 100% accuracy. However, by refining your investment decision-making framework and processes and by cleaning your information inputs, you can increase your success rate significantly. You only need to be right 80% of the time to be a very successful investor.

CEO Q Interview

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Lessons from the Global Economic Crisis