Sublime Sub-prime - Part 3 of 3
Keywords: Tony Melvin, Sub Prime.

By Tony Melvin, founder and Author

In this final part to this 3 part series we answer the question: Why did this happen? (so we can learn from it)

Having looked at the possible repercussions of the sub prime crash and how the investor can proof themselves (see part 1 and part 2) let’s look at why this happened.

Doing my own research I’ve discovered that there is no definite answer to this question. There are plenty of theories but there’s no definite reason.

To explain the global financial market in the most simplest way - lending institutions pool funds together, loan them out to investors and then sell the “loans” so that they can repeat the cycle.

Sub prime loans were once easy to sell as a collective fund. Slowly however they became harder to sell. The key point here is to realize that this happened slowly.

Although the market appeared to suddenly crash this was not the case. Early warning signs appeared in 2007. In fact I read an article in a finance broking industry magazine that talked about a possible sub prime crash in as early as 2007.

It’s safe to assume then that for those in the know, it was imminent that the financial markets were heading for disaster.

So why did it happen, or should I say, why was it allowed to happen?

Rising interest rates are a sign of a poorly managed economy. And the US has been very poorly managed in recent years pouring more money into war than almost any other endeavour. It is no surprise that they are in such financial turmoil.

But while I have my own theories on why this has happened (and they make for good party talk) it serves no real purpose discussing them unless you can do something about it.

It short the investor can learn a lesson from the sub prime crash by realizing this one fact: You are the only one who will look after your best interests in the long run.

Keep well informed and seek professional advice from a range of experts (not commission sales people but from people who have actually done it or are doing it) and then make your own decisions.

The one thing you can count on is change and the only way to keep up is to keep on learning.

As the world gets smaller with the internet and information is more easily obtainable the investor now has a wealth of resources available, more than ever before.

Money has become the benchmark we use to rate a person’s success. But this is a very fickle measuring system. It is possible to lease a fancy car and as you drive it around people think “success”. But now that loans are harder to get and many are being “called-in” those with apparent success are being exposed as people with little or no real wealth. This lesson is a little late and provides no consolation for the Mums and Dads who work hard and are finding it difficult to meet the interest repayments on their home.

However it is a valuable lesson.

Let’s summarise the lessons from the sub prime market:

1. Separate fact from fiction and realise that media tend to sensationalise the “bad news”.
2. Statistics show that less than 5% are truly wealthy so be prepared to go against the majority.
3. Work out your own investing goals.
4. Decide on your own strategy to achieve those goals.
5. Learn the strategy from someone who has done it.
6. Remember it is a game and it should be fun – if you get serious there’s something wrong!

These 6 points apply in any economic environment – booms and busts.

And remember what Warren Buffet said:

"We simply attempt to be fearful when others are greedy
and to be greedy when others are fearful”

Author & Founder

books by Tony Melvin