I am Worried About Goldman Sachs

I cannot remember if I have disclosed this before, but I own some Goldman Sachs stock. It is not a particularly large position, less than 1% of my net worth. But it worries me. I came close to selling yesterday and might just let it go today.

It is not that I don’t think Goldman is a great company. And it is certainly not that I think the stock is overpriced. With a trailing PE of less than 7 and no obvious threat to near term profits, it is, or ought to be, compellingly cheap.

The problem is that there is a chance, maybe not a big one, but a significant one, that the stock will go to zero. Not because of a problem in Goldman’s business, nor because the firm did anything it should not have, but because the federal government will decide to destroy it. Basically, I am worried that Goldman will get lynched.

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House Prices Now Boring

Once, in a now faintly remembered time, we were obsessed with house prices. Even as recently as a year ago, such obscure arcana as the Case-Shiller Home Price Index was closely followed. Looking back it is hard to understand why. It was almost as if we thought that houses were a significant slice of our national wealth, that a change in their value might actually effect consumer sentiment and spending, and that a sharp drop in house prices, of all things, had set off the Great Recession. As if.

Of course, now we know that the Great Recession was started by a mid-level employee in the London office of Goldman Sachs.

Yesterday S&P released the monthly Case-Shiller numbers for February. It did not get a lot of coverage. True, that may be partially attributed to sharing a business news cycle with surprisingly strong consumer sentiment numbers, a turn for the worse in the Greek Crisis, and the ritual sacrifice of Goldman execs to appease the mid-term election gods. But it is hard to escape the conclusion that we have simply lost interest in house prices.

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Past Performance and Future Results

“Past performance is no guarantee of future results.”

This is one of those legal incantations of gravity and vague importance that have become so familiar that we do not fully appreciate the meaning. “You have the  right to remain silent.” is another example.

The past performance phrase is often spotted at the bottom of mutual fund ads. The rest of those ads, of course, generally do little else than tout past performance.

You cannot fault the fund companies for their focus on old return numbers. When you get down to it, there is not that much else to say about a mutual fund that would make good ad copy. Airbrushed glamour shots of the fund manager will not sell many shares.

Alas, the Wall Street Journal’s Fund Track column recently carried the argument, lifted from a recent academic paper, that the past performance disclaimer is obviously not adequate.

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Money as Medicine

There are actually people who think that money might not be the ultimate source of human happiness. These fringe thinkers argue that what makes us happy are the mundane trivialities of days at the beach, good food, sex, and so on.

Of course, the counter-argument is that all those things can be purchased with money. Moreover, the more money spent on them, the more people tend to enjoy them. That could be because the nice stuff is more desirable so its price gets bid up. Or maybe the fact that more of that magical money stuff is involved means that it makes us more happy.

Recent scientific evidence supports the theory that it is money itself that brings happiness. Researchers at the University of Minnesota had college students count either $100 bills or slips of paper before dipping their hands in 122 degree water. The money counters felt less pain.

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When to Junk a Car

My basic advice on cars is that you should buy them mildly used, two to four years old, and drive them until they are inert heaps of rust. This is based on the commonplace observation that used cars are generally a better deal for buyers, that is, that relative to new ones they are cheaper than really makes sense.

Whether this disconnect between new and used car prices is because consumers irrationally prefer new ones or irrationally fear used ones is a metaphysical question I am not going to answer. But the gap is there, and many personal finance types will advise you to buy used rather than new because of it. I don’t disagree, but there is an equally important second principle to be drawn from the new/used price anomaly. Besides “never buy new” there is “never sell used.”

We can all probably agree that buying a car new and selling it used two or three years later is just about the most wasteful way you can own wheels. But buying it as a three year-old and selling it at six is not that far behind. You capture the used car discount when you buy, only to give most of it back again when you sell.

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