If you have been following the Securities and Exchange Commission (SEC) civil suit against Goldman Sachs, you know the SEC is suing the firm for underwriting and selling a synthetic collateralized debt obligation (CDO) without disclosing to the buyers that a hedge fund taking a short position in the deal helped select the securities referenced in the CDO. The SEC is focused on whether or not Goldman made misrepresentations to the buyers. Whether or not the allegations against Goldman are true, there is a valuable lesson here for investors. The counterparties in the Goldman synthetic CDO deal were savvy, sophisticated institutions, but they made a vital mistake. They reached for yield in hopes of picking up a few additional basis points. Instead they lost almost everything. Don’t reach for yield. Remain disciplined and patient when you invest in fixed-income securities, even if that means accepting a lower return.
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Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.