I would like to put forth my first nomination for the understatement of the year award. For this prestigious award I would like to nominate Jamie Dimon, the CEO of JP Morgan. In response to a trading bet that lost $2 Billion (yes, that is billion with a ‘B’), Mr. Dimon said that the trading bet that the firm made was “poorly reviewed, poorly executed and poorly monitored”. To my way of thinking, “poor” seems to leave the door open on the performance scale to something worse, like say, “terrible”. If a “poorly reviewed, executed and monitored” trade produced a $2 billion loss, I would hate to see what the results of a “terribly reviewed, executed and monitored” trade would be. I for one would not be sticking around to find out.
As an investor, what can you learn from JP Morgan’s $2 billion loss? Here are two big things –
Don’t Buy Things That You Don’t Understand
In the case of JP Morgan, they said that the strategy they had been using to hedge risks “has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed.” That’s a fancy way of saying they didn’t understand what they were buying. They had a created a monster and the monster turned around and bit their head off. Let this serve as a cautionary tale – don’t buy things that you don’t understand.
Don’t Judge a Decision Based on the Outcome
If I tell you that I am about to drive 100 miles per hour on my drive from DC to New York City would you have to wait and see the outcome of that decision before you could tell me whether that was a good decision or a bad decision? Of course not. Whether I make it in record time or plow into the back of an 18-wheeler on the NJ Turnpike, it is a bad decision. The outcome does not determine the quality of the decision.
In the same way, although it is tempting and convenient, don’t judge a financial decision as good or bad based on the outcome or the results. The quality of a decision should be judged ahead of time based on the merits and the quality of the decision itself. I will assure you that the JP Morgan trade would have been touted as brilliance if the bet had gone the other way and JP Morgan had made $2 billion. Although the facts would have remained the same – to quote Jamie Dimon, they still would have made a trade and a bet that was “poorly reviewed, poorly executed and poorly monitored”. Just like a decision to drive 100 MPH from DC to NYC is a bad decision even if you make it to NYC in record time, making a financial decision that is “poorly reviewed, poorly executed and poorly monitored” is bad even if you end up making money.