One of my favorite sayings in life is “once is an accident; twice is a pattern.” We are all human and, by very nature, fallible but the difference between the average and the great is that the great learn their lessons while the average keep making the same mistakes again. Thus, I wanted to dovetail on a post by Canadian Capitalist earlier this week on lessons from the ABCP Fiascio. I ramble a bit in the comments section about how the financial institutions crammed down the little guy and no one caught it until it was too late. But I wanted to focus more on lessons we can learn as retail investors from subprime and its assorted collateral damage so (hopefully) we don’t make the same mistakes again.

Tax deductibility is not the primary reason to invest in something. People bought homes they couldn’t afford, leveraged their homes into other investments or bought investment properties based partially on the premise that interest on mortgages, HOLEC’s and loans are tax deductible. In the criteria for why you should invest, tax deductibility should be quite low in the scale since the tax rules change all the time and, sometimes without notice (see the income trust tax decision). However, no matter what the tax regime, good investments are good investments regardless of tax treatments. Always run your analysis as if you could not get tax deductibility. If you make money on it even without tax deductibility, you should be ok. If part or all of your return depends on tax deductibility, you are exposing yourself to regulatory risk and you are not investing on fundamentals of the product but external and uncontrollable factors.

Don’t buy any security without reading the disclosure document. Too many people bought ABCP without reading the disclosure documents and ended up being surprised that they weren’t investing in government guaranteed paper when the structure cratered. If the investment doesn’t have any disclosure documents, you had best to walk away. If it has disclosure documents, read before you buy and make sure you understand what you are getting yourself into. If you advisor will not give it to you or understands it, well, you have another issue don’t you (see Canadian Capitalist’s comments about investment advisors)?

Following the crowd is not an investment strategy- unless you like to lose money. People bought homes they couldn’t afford because the everyone said it was time to buy. People leveraged their homes because everyone said money is cheap and the interest deductible. People invested in real estate as investments because everyone said prices never go down. People said buy ABCP because it is safe and the pension funds are doing it. Hindsight being 20/20, these were not the best strategies to achieve financial independence but relied on a herd mentality (its easy to shut off your mind if your reasoning is “if its good enough for Mary and Jim, its good enough for me”). However, we haven’t broken the cycle. People said get out of banks and buy gold because it is a safe investment. The price of gold fluctuates day to day- wildly. Recently, it moved $33 in a day! This is not what I call a safe investment.

PERSONAL FINANCE IS HARD WORK. DON’T RELY ON OTHERS TO MAKE DECISIONS ABOUT YOUR MONEY. TAKE THE TIME TO LEARN ABOUT YOUR FINANCES AND MAKE INFORMED CHOICES WHICH ARE BASED ON WHAT IS BEST FOR YOU. It is unfortunate that too many people caught up in this mess are blaming others when, in many cases, the problems could have been avoided by taking some personal responsibility over their money (I readily acknowledge some people legitimately got hood-winked). Its your money. Take the time to care for it with as much diligence as it took to make it.

No post tomorrow. Have a great weekend.