Follow the Guys Who Lend the Money

Posted: May 22, 2012 12:01 AM

When my career in the financial industry first began I asked my grandfather, J.D., if he had any sage words of advice about the markets. 

At that time, in the early 1970s, it seemed all so confusing. 

Every Friday, a few guys checked the money supply; others would analyze the latest earnings reports, always looking for an edge. 

My colleagues never ceased to study anything and everything that could make a stock move higher or lower.  After all, it was all about the markets. 

I continually pestered my grandfather, a broker with 57 years of experience who was there for the big one in 1929, to steer me in the direction that would truly give me an edge over all my competitors. 

He would routinely say “sort it out, some things are important and some things aren’t” or “Some things are time gainers, some things are time wasters.” 

It seemed like he had the answer but just refused to share it with me, his grandson.  Near the end of my grandfather’s life, with very few days left, I distinctly remember our final conversation. 

He was chuckling over how difficult I found the markets and the confusion that I endured caused by so much information.  (Speaking of too much information, imagine if he was alive today.) 

I reminded him that of all the great advice that he had dished out through the years, there was one area in which he held back. 

He knew exactly what I meant. 

There was a long pause on the phone and then he said “trust the guys who lend the money, not the guys who borrow.” 

At first, it made no sense to me.  Yet, many years later I found it to be one of the wisest pieces of information that I ever received. 

You see, he was talking about the equity markets and the debt markets. 

If corporations, municipalities, or even sovereign nations have problems that can be hidden, public relations and equity will usually reflect hope, optimism, and even a sense of success. 

If, however, the reality is concern, worry, fear, and even panic, then it will always be reflected in the debt markets. 

Normally, the first to get paid are the debtholders.  They will have a much better handle on reality versus the stockholders who get paid last. 

This all makes perfect sense given our current situation. 

For the past several weeks and months, debt has been telling a story that most equity holders choose to ignore and even deny. 

Nevertheless, reality is truly setting in as the worldwide equity markets are all breaking down. 

It took a while, but J.D.’s advice is as good today as it ever was.