Learning from Citigroup

| November 24, 2008 | Reply

This post is from Michael Yoshikami, President and Chief Investment Strategist of YCMNET Advisors, a wealth management firm, as quoted by CNBC

With the announcement that Citigroup is being rescued by the U.S. Treasury, the
FDIC, and the Federal Reserve, a long journey has ended for this fabled
financier.  Citi has now agreed to government regulation which will
forever alter this once proud institution.

What
lessons can we learn across the globe as we watch Citigroup fall under
the Federal government’s umbrella?  Are the lessons the same in Asia? 
America? Everywhere?

Indeed
they are! They are universal truths we can all profit from. Understand
these lessons and it will help you navigate your way through today’s
treacherous environment.

  1. Do not
    underestimate the downside for any investment
    . Citi hoped real estate
    markets would not fall. They hoped we would not fall into a recession.
    They hoped that the consumer would spend forever. Now they are paying
    the price for unbridled optimism. Examine every investment you make and
    ask yourself this simple question: What can go wrong and can you live
    with the pain?  If the answer is no, get out. 
  2. Leverage
    can be dangerous. Use at your own risk.
    Citigroup has many great
    businesses generating hundreds of millions of dollars of revenue, but
    like AIG,
    a few decisions left unchecked by risk controls brought the entire
    company to its knees.  The reason for the dramatic impact — leverage
    was involved.  Anyone who has ever faced a margin call knows what
    leverage can feel like when it goes against you. So Be Careful:
    Leverage can take you down a nightmare path and unwind every other
    profitable investment in your portfolio.
  3. Face
    reality and run from denial.
      Looking at the truth about your current
    situation is important if one wants to survive these volatile times. 
    Believing your own marketing and chants that "everything will be okay"
    is a recipe for disaster. Here’s a simple question to ask:  If you had
    cash to invest today, would you buy that same investment?  If the
    answer is no, then it's time to take another look at whether you should
    be in that position. I'm sure there are a few assets that Citi wished
    it didn't own. According to news reports about $300 billion worth.   
  4. Learn to swallow hard and take action.  In a previous column on CNBC.com, I mentioned how important it was to not be like a deer in the headlights.
    Inaction rarely makes problems go away. Take discomfort in the chops
    and face reality.  Facing the truth now is far better than waiting
    until you are forced under dire circumstances to see reality. 

Of course, these lessons do not apply just to stocks. They also apply to start-ups. As an angel investor, never invest more in one company than you can handle. If it keeps you up at night, you should seek a way out. Also, take a second and third look before you pull the trigger. Do they have a sustainable model, or are they hoping to get sold before the money runs dry? Either can win, but the second is more like an option with an expiration date than an equity position.

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Category: Stock & Investing