“What the heck was that?” was the punch line for a joke that I can’t forget, even though it wasn’t all that funny. The line was delivered about fifty years ago by a magician who was performing at my intermediate school. To distract our attention while executing his illusions, he kept up a constant banter of adolescent jokes. The one in question was about his wife practicing for a community play. Her one line, “Hark! Is that a cannon I hear?” was to be delivered in response to the distant rumble of battlefield artillery. However, when her big moment arrived, she was so startled by the loudness of the sound effect that she screamed the “what the heck” line, instead of the one she had so diligently practiced.

Recently, the financial world was startled by the very public resignation of Greg Smith from Goldman Sachs. In a New York Times op-ed, he explained the reasons why he was leaving. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” The next day, in an agreeing response, John Bogle wrote, “When I came into this field, the standard seemed to be ‘there are some things that one simply doesn’t do.’ Today, the standard is ‘If everyone else is doing it, I can do it too.’ When we replace moral absolutism with moral relativism, traditional ethical standards go by the board.” So how did Wall Street lose its moral compass?

Michael Lewis, the author of The Big Short, believes it all began “…when, in 1981 [John Gutfreund]  turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.” Lewis claims that from that moment on, Wall Street became a “black box” where “…the shareholders who financed the risk taking had no real understanding of what the risk takers were doing, and, as the risk taking grew even more complex, their understanding diminished.” Wall Street went from a place where profits were made by serving clients and allocating capital to productive pursuits, to a place where smart people could make big money making risky bets. In the process, Lewis says, “The customer became, oddly, beside the point.” He doubts that Wall Street would have ever become so highly leveraged with such exotic securities and so alienated from its clients if the firms had remained as partnerships. With their own money at stack, Lewis suspects, “The short-term expected gain would not have justified the long-term expected loss.”

But with Wall Street executive compensation tied to quarterly results and insulated from long-term consequences, Lewis says, “They can get rich making dumb decisions.” The CEO’s of all the major Wall Street firms were on the wrong side of the mortgage crisis. “All of them… either ran their public corporations into bankruptcy or were saved… by the United States government. They all got rich, too.”

Since I first got into the financial services business thirty years ago, the joke has been that Wall Street takes risky bets because if they win they get to keep it, and if they lose the government bails them out. It’s another one of those jokes I can’t forget, even though it isn’t funny. What makes it even less humorous is after the 2008 financial crisis and the passage of the Dodd-Frank bill, nothing seems to have changed. In 2011, Jon Corzine bankrupted MF Global by betting the farm (and it appears a lot of farmers’ money) on a highly leveraged European debt scheme.

Corzine’s fiasco was another “What the heck!” moment where Wall Street’s greed and incompetence were exposed. By subordinating clients’ and shareholders’ best interests to their own interests, Wall Street is not-so-magically making client funds and shareholder value disappear.

Not long ago I received an email from a niece, Claire, who robs trains on weekends. Actually she does Old West reenactments. This particular email related a conversation she had with the engineer of a locomotive she had just held-up. Having discovered in her genealogy pursuits that her great-great grandfather (my great-grandfather) had been killed by an exploding boiler on a steam ship, she had some questions about the causes of such explosions. Claire explained that our ancestor, John Bradbury, had been killed in 1853 aboard the Jenny Lind, a steamboat operating in the San Francisco Bay. What she wanted to know was, “What was different about steam-powered boilers now versus those that were exploding so frequently in the mid-1800s?”

The answer surprised her, “Nothing.” The materials, the wall thicknesses, rivets and basic design practices all remain relatively unchanged. What has changed are the maintenance practices. Today’s boilers are cleaned every month and they run only softened water through them. In John’s time, boilers were regularly inspected and the Jenny Lind had just recently passed such an inspection. Since there were no obvious structural problems, this suggests that the engineer may have been correct in his assertion that the explosion was due to maintenance problems.

According to Claire, the engineer described two scenarios that could have caused the Jenny Lind’s boiler to explode: low water levels or sediment in the water. Interestingly, I have found that retirement portfolios rupture for similar reasons. Allowing water levels in a boiler to drop to hazardous levels is a perfectly avoidable catastrophe caused by negligence. Likewise, low funding levels in retirement accounts are caused by inattention. Throughout the accumulation stage, workers need to diligently fill-up their retirement accounts. Once distributions begin, retirees must constantly monitor portfolios to ensure that excessive spending doesn’t dangerously drain their accounts.

Even if water levels are adequate, sediment accumulation can cause a boiler to suddenly explode. It’s my understanding that excessive heat retained in the sediment weakens adjacent walls. Similarly, retirement portfolio failures are caused by overheated emotions that undermine sound investment strategies. For boilers, the solution to this problem is soft water that is free of impurities. For portfolios, the solution is disciplined strategies that are free of counterproductive emotional responses.

Fear and greed are two of the most powerful emotions that muddy our thinking. Without a clear plan that is diligently followed, the pressure to sell stocks in declining markets and buy them in rising markets is too strong to resist. But instead of learning our lesson after repeated failures to maintain discipline, investors are often enticed to avoid future disasters by filling their portfolios with murky alternative investments and other complex strategies.

Sediment in the water was most likely the cause of the Jenny Lind explosion, because in the 1800s steamships that traversed the southern end of the bay regularly filled their boilers with muddy water from the shallow sloughs in the area. Whether it was sediment or low water levels, the remedy is the same: a disciplined maintenance program. Similarly, for avoiding financial failure in retirement the solution is found in preserving adequate fund levels and maintaining disciplined investment strategies.

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