It should come as no surprise that you have not heard of Hyman Minsky. This economist was an eternal pessimist, drumming up all kinds of reasons for markets to crash. Business and stock investment revolve around optimistic forecasts, so the Minsky Moment, which is a label for a liquidity crisis, is not something people like to discuss.
Greed is the stark reason behind every Minsky Moment or liquidity crisis. The term is used for the economy as a whole, but it can apply to any corporation or individual stock investor. You can forget about the macro situation, which has threatened most of 2008, and build an enterprise or a stock portfolio that steers clear of a liquidity crisis. Here are five ways to keep Mr. Minsky’s doomsday from your doors:
1. Favor equity and reserves over debt
2. Keep Interest Coverage high
3. Be conservative in asset valuation
4. Moderate trading in derivatives and options
5. Beware of marketing hype by financial institutions
Such a conservative approach will mean that you get left behind at times. Bull runs will see your peers grow faster than you. However, you will have the last laugh, because the events since September 2007 prove that Hyman Minsky was right. Providing for uncertainties and downturns does not mean the worst will happen, but you will not be found wanting should disaster strike.
Let us hear your thoughts below: