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Spitz counsels skepticism to counter 'seductive' markets
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Bill Spitz' contrarian views may have been a key to success
Greed, hubris and fraud have repeatedly brought financial crises, and there's no remedy in sight for crises such as that currently roiling the United States and the world, according to investment and asset-management expert William T. "Bill" Spitz, based here in Nashville.

Spitz told VNC yesterday he fears there may be no real remedy to the seductive power of the marketplace that fuels speculative bubbles, such as that which has burst in the mortgage-finance sector.

Worse, Spitz is also among global observers who feel that despite a Federal rescue of mortgage institutions, financial shockwaves may continue to spread, and a second "minibubble" may burst in the commodities sector.

He explained that during more than 34 years in investments he has witnessed a half-dozen or more "bubbles and disasters of one sort or another... the fundamental factors are always the same and people don't learn."

"The world is so seductive," he continued. The simplest scenario:  "You go to a cocktail party and some guy says I just made $100K trading in Google stock, and you sit there thinking, God, I must be the stupidest person on Earth... I've got to get on the bandwagon!"

"When you begin to see people quitting their day-jobs to trade stocks and flip houses," the cycle is well underway, Spitz said.

Though some feel immune to manias, Spitz insisted, "I don't care how long you've been in the investment world, or how sophisticated, you're still susceptible" to the siren call of speculation.  "People in investment can spin a great story," he said. Consequently, he added, "I've known several people who I felt were pretty upstanding people who got on the wrong side of the line" and who faced jail for fraud or other illegal financial activity.

Spitz, who retired 14 months ago from his post as Vanderbilt University's acclaimed treasurer and endowment leader, said he has come to believe that the only antidote to resisting the temptations of the speculative cycle is to become "hugely skeptical and hugely cynical," innoculating oneself against crowd pressures enough to allow time to "step back and say, 'Does this really make sense?'"

Spitz said that his acquired penchant for taking "contrary positions" in the face of market trends produced "most of the good decisions" he made throughout his career. "Most of the bad decisions I made in my career," he added, "were getting on the bandwagon late."

During Spitz' years at the helm, Vanderbilt's endowment grew to $3.5 billion from $300 million.

Spitz, who left Vanderbilt a year ago with little fanfare after 22 years there, will on Sept. 22 receive the "Lifetime Achievement Award" presented annually by Foundation & Endowment Money Manager (FEMM), an Institutional Investor service that tracks investment strategies of nonprofits.

Spitz is co-founder and member of the board of Diversified Trust, an Atlanta-based wealth-management firm formed 14 years ago.  Spitz also serves on the board of Mass Mutual Financial Group, a Fortune 100 firm with $500 billion in assets under management.  He is also a board member with Acadia Realty Trust, based in White Plains, NY; and, London-based Cambium Global Timberland Ltd., both publicly traded companies.

At VNC's request, Spitz described his view of the vicious cycle of boom and bust, a cycle he believes was at the center of the Tech bust earlier in the past decade, as well as in the current housing-mortgage calamity -- and which is widely believed to be at work in global commodities markets for oil, copper and other goods.

The stages described by Spitz, greatly summarized here:  First, "prices of some assets go up and get above their long-term trend," breeding speculation. "Wishful thinking" then propells extrapolation from results of the "recent past," leading professionals and laypersons, alike, to believe prices will continue to rise.

Leverage then increases, Spitz said: "If one condo's great, go buy five -- that'll be even better." Soon, non-borrowers come in from the sidelines and borrowing booms. Typically, Wall Street then "finds ways to create some derivatives in all this to make it more complex."

"Then, valuations get way, way above any historical norm," but the crowd says, "Don't worry," suggesting somehow things will be "different this time."

Next, "there's some kind of triggering event that begins to unwind it all – and it's never clear what the triggering event is," Spitz continued. Interest rates rise, prices drop, and a liquidity crisis emerges, as borrowers have trouble rolling-over their borrowing, bankruptcies spread. Lending institutions then pullback from lending, contributing to recession.

Federal bailouts, such as now underway, may stop the free-fall, but many observers believe they can also set the stage for further overspending and debting, because individuals and markets believe government is always ready to defuse the situation, thereby reducing the perceived pressure of the moral imperative of responsible behavior.  [Related VN Blog post.] ♦

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Tags: Acadia Realty Trust, bubble, Cambium Global Timberland, credit, Diversified Trust, Fannie Mae, Freddie Mac, housing, investing, Mass Mutual Financial Group, moral hazard, speculation, Vanderbilt University, William 'Bill' Spitz

Members Opinions:
September 09, 2008 at 12:00am
Great story, Milt, and it's so good to hear wisdom from Bill Spitz. I was told by a real estate investor friend five years ago when tempted to buy a house, that "the banks are up so some funny business in mortgages right now. A lot of people are going to be misled and will be screwed over." So glad I listened to this prophet back then. You zip through those mortgage papers at signing--20 or so at least--and take the realtor's word for what it's about.
The focus has been on deadbeats buying houses, but that's not really the issue. I'm glad Spitz as usual is willing to say "what it is."

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