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Lehman Bankruptcy, Bank of America/Merrill Lynch: What Can We Learn Here?

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I try to take a couple of weeks of vacation outside of America and Wall Street explodes. Lehman is filing for bankruptcy. Bank of America is buying Merrill Lynch. I don't even need to get into American Insurance Group losing a third of value. It will teach me to get away from it all in isolated resort in Phuket, Thailand. I should be sipping Singha's by the pool now, but I found myself drawn to the financial news.

One analyst on BBC World was asked about Lehman's reported bankruptcy filing. He made a great point they don't have a steady stream of deposits - and they don't enjoy the same Federal protections. This is in contrast to companies like Bank of America and Citigroup who are much more diversified. It is this diversification that is allowing Bank of America to buy Merrill Lynch. Once again, we are reminded the value of diversification. Interestingly the next question was about whether it's no longer worth it to "focus on one thing and do it well." The analyst kind of panned the question. I would have said that it's great to be focused in a popular area when times are good. When times are bad, it can be trouble.

Doesn't that bring up an age old dilemma - is it better to diversify or focus? In many instances, I believe in diversifying. For investing, I think it's just a certainly the way to go. When it comes to income streams, I believe in diversifying as well. Perhaps, I don't give focusing it's due. When it comes to being really successful, it seems that most do it by focusing on a few things and being the best at them. Aerosmith lead singer, Steven Tyler, says that anything worth doing is worth doing right. I mention that example, because he's one of the best in the world at what he does. More than ever before, I'm reminded that diversifying seems to lead to a safety and possibly an average to above average lifestyle, while those looking for more may be better off focusing - just be prepared to end up bankrupt in your quest for greatness.

Posted on September 15, 2008.

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6 Responses to “Lehman Bankruptcy, Bank of America/Merrill Lynch: What Can We Learn Here?”

  1. I’m all for focusing on one thing (or stock) and putting all your energy into making it work, but you better be positive that you’re doing it right. These days, it’s hard to find someone (or something) that you’re that sure of. And if you’re investing in financials, it’s impossible to know what’s going on if you’re an outsider. You can’t even trust the numbers they’re putting out anymore.

  2. Miranda says:

    Great post! Hope you’re back to enjoying your vacation. At any rate, I tend to agree with you. Diversifying (but in moderation, of course) works well for me, since I’m just looking for some regular streams of income that will take me into retirement and beyond in my comfortable but modest lifestyle.

  3. Well said. Diversification is your friend during the bad times, but it can also be your enemy in the good times. The point is finding a balance between the two, and knowing the time to get out is when everyone else is trying to get in.

  4. diversification-diversification-diversification

    diversification is a key of any investment. also, basic information about FDIC insurance (just google “FDIC insured”) may help you to protect your cash in checking, savings, IRS, money market account.

    BTW, its a really good article.

  5. Julie says:

    Hi all, I work for ShoreBank (http://shorebankdirect.sbk.com/). In addition to knowing that your money is invested conscientiously ““ it’s nice to know that it’s SAFE too! Be sure that your bank is FDIC insured, and also pay mind to other security measures. ShoreBank, for instance, has $2.2 billion in assets to add to its security. They also have a 3.5% interest HYSA – so have a look at the link!

  6. Tim says:

    it comes down to fundamentals: diversify, don’t risk more than you can afford to lose, and don’t spend more than you make.

    FDIC is fine at the moment, but if a major bank collapses like citi or bac, there won’t be sufficient FDIC capital to replace $1 for $1. and not all deposits are created equal. just like everything else, do not rely on one safety net. who would have thought the $1 to $1 money market fund would drop below $1? no one. so, although fdic looks good as a safety net, i wouldn’t completely count on it. with banks not willing to lend each other money, it is best to diversify accross banks now too. again, this experience should teach us a great deal about many fundamental and basic financial axioms, rules, behavior, whatever.

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