Friday, March 28, 2008

How to lose $900 million

You've got to feel sorry James Cayne, the chairman of Bear Stearns. He was once worth a billion dollars.

But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.


Well, maybe not too sorry.

[F]or Mr. Cayne, the liquidation evokes a deep sense of loss.


Well, yeah. But still not feeling too sorry.

To the end, Mr. Cayne heeded the advice he often gave his colleagues at Bear: hold on to your stock. Whether the stock was flying high, as it was early last year, at $171, or plummeting, as it did in recent months, Mr. Cayne kept the vast bulk of his 5.6 million shares.


OK, sympathy gone. How stupid is that? As long as I can remember, a basic principle of investing is do not put all of your eggs in one basket. Diversify. That's why most people have not just several different mutual funds in their 401(k)'s, but different kinds of mutual funds. And yet this guy, head of an investment bank, and therefore allegedly a very savvy investor, did not follow this very basic advice. He might claim that keeping all of his stock is a sign that he has faith in his company. But it's also a sign that he's not a good investor. And if he has that much faith in his company, he's an egotist. No one is perfect. No one is that good. With the possible exception of Warren Buffett. Who, it should be pointed out, has his wealth tied up in Berkshire Hathaway. But that company is itself a great example of diversification of investments.

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