Bear Stearns — Lessons Learned

By now I suspect that most of you are intimately acquainted with the bailout of Bear Stearns (BSC) by the Federal Reserve and rival bank JP Morgan Chase & Co. (JPM). That’s why I am not going to rehash the details of this fiasco here. Rather, I think the details of the bank’s demise are far-less important than the lessons to be learned by you, the individual investor.

What are those lessons? Well, I’m glad that you asked.

The first lesson here is that the price action in a stock matters. When a stock falls below both its 50- and 200-day moving averages, it’s usually headed for trouble. Of course, most stocks don’t descend as rapidly as BSC shares did (see chart below), but nevertheless, you always should pay attention when one of the stocks you own falls below both its short- and long-term moving averages.

The second lesson to be learned here is that you should never, ever put all of your retirement eggs in one basket. As a result of the Bear Stearns collapse, many employees of the firm not only lost their jobs; they lost a significant portion of their retirement nest egg.

Many Bear Stearns employees held the company’s stock in their 401(k) accounts (the company was nearly 30% employee owned), and as you might suspect, the value of those retirement accounts has been smashed.

I read about one man who owned about $2 million worth of BSC shares just a few months ago in his employee retirement plan. That $2 million is now worth just $38,000. Now, how would you like to grapple with that man’s retirement losses? I know I wouldn’t, and that’s one reason why you should always have a diversified retirement nest egg.

Finally, in a market such as this, you simply have to have a strategy in place that can help you harvest your money out of the equity holdings you own. There is no worse feeling in the world than to see your once-mighty nest egg crumble in value. If the Bear Stearns fiasco has taught us anything at all, it is you must have an exit strategy in place for every investment you own.

The sooner that you put that strategy in place, the safer, wiser and wealthier you’ll be.

Lessons learned.