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Disciplined Investor®

Caveat Emptor: Let the Buyer Beware

November 24, 2009
Nigel Johnson, Andrew Pace

In the past several months we have written articles on the dangers of structured notes and callable step-ups. Both of these products were created by the Street to meet a need felt by investors. In the case of the step-ups, there is a need to put dollars to work in a product that will do well (“step up”) when rates rise. The structured note feeds a much more basic need, a need for yield (as high as possible). In the previous articles, we learned to put emotion and intuition aside, and by crunching the numbers and running the shapes, we illustrated that what appears to be attractive investment alternatives are actually poor risk/rewards.

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The Performance Trust Balance Sheet Look-Forward™

November 10, 2009
Disciplined Investor®

The Rubik’s cube of risk management is particularly challenging in this environment. Management has the task of balancing the capital, asset quality, earnings, liquidity, and rate sensitivity positions of the institution. Because of the interconnected nature of these components, at times it can be difficult to properly identify which component actually presents the most risk. Even when risks are properly identified, it is often not clear what strategy to pursue to alleviate that risk. Management must both accurately identify the risk (nature and magnitude) and develop the appropriate strategies to manage it without significantly negatively impacting other areas of the institution.

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