Goldman Sachs Could Win Its Case but Lose Its Clients

Monday, April 19, 2010

Goldman Sachs (GS) is attempting to overcome the SEC’s fraud charge, claiming it acted legally. Well, it may have. But what about ethically? That is the measure that most people apply when deciding whether someone has acted correctly – especially with regards to money. So, Goldman may prevail in court, yet lose its clients’ trust.

Early in my career, I got some valuable advice: When selecting investment managers, first find out if they are honest and humble. Then figure out if they can manage well.

“Honest” and “humble” are certainly not legal terms, but they are necessary characteristics for earning trust. And “trust” above all else is the key to a healthy, successful relationship in finance and investments.

ETHICAL BEHAVIOR – DOING THE RIGHT THING

Ethics has been the subject of many writings. Much of the focus has been on individual choice – deciding between personal gain and the common good.

A business that makes nothing but money is a poor kind of business. (Henry Ford)

Obviously, acting ethically is desirable. The problem is, in a competitive environment, doing the right thing can lose out to baser approaches.

ETHICS IN THE REAL WORLD – THE NEED FOR INCENTIVES

Laws and regulations are needed to incentivize ethical behavior. This fact is especially clear following troublesome times in which undesirable (but legal) behavior caused significant distress. That’s why many of the powerful laws governing Wall Street were written just after the Great Depression. And we see similar efforts being taken today.

Wise laws and regulations are not government interference – they are “rules of the game” to ensure competitive behavior is ethical.

INVESTING WHEN TRUST IS ON THE ROCKS

All’s fair in love and war – and Wall Street. Does that fit your feelings? Does cleverness seem to trump morality in money matters? When you hear about $billions being earned in Wall Street – sometimes by an individual – does it seem that the place is rigged so that only the insiders win?

Remember this: Wall Street hasn’t fallen off its pinnacle. It was never on a pinnacle. “Wall Street” is simply a figurative label for the spot where money flows come together. Our job is to use Wall Street to serve our investment needs and not look to it for guidance and leadership.

If you haven’t already, please read my four-part series, “Beating Wall Street at Its Own Game” (Investment Directions, April 12-15). We can use Wall Street without being subjected to its twists and turns.  Doing so means being wise and careful, but those are important traits for successful investing anyhow.

So… Go ahead. Say and feel what you want about Goldman Sachs, John Paulson and Wall Street. But don’t let the distasteful stuff affect your investment well-being.

Disclosure: No position in Goldman Sachs (GS)

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