The Dow Jones Industrial Average (^DJI 0.57%) started the day down 78 points but has since rebounded on a surge from Goldman Sachs (GS 0.74%) and is now nearly flat for the day. As of 1:30 p.m. EST the Dow is just above breakeven. The S&P 500 (^GSPC -0.48%) is up five points to 1,772.
Goldman Sachs started the day down but rebounded as the day went on and is now up 0.6%. With its high stock price, Goldman is the third-largest stock on the Dow by weight. Weighting by stock price is a terrible method, but the DJIA is stuck with it. I recommend investors follow the S&P 500.
Yesterday, Goldman CEO Lloyd Blankfein spoke at a conference organized by Bank of America. Blankfein talked about the challenges his bank has faced and the company's returns. He noted that Goldman's 10.4% return on equity wasn't great but was better than rivals', noting, "While we have generated good relative returns in the last five years, they are hardly aspirational." Analysts pointed out that the double-digit ROE only came because of a large drop in compensation as a percentage of revenue, falling from 43% to 35%.
Still addressing ROE, Blankfein said, "I happen to think that's a pretty high number given that the risk-free rate of return is zero." He added: "Difficult operating environments might lead management teams to overreact. However, when you have a strong franchise and a track record of superior returns, overreacting may be the most dangerous thing that you can do."
Corporate managers are human like everyone else and are prone to mistakes at the worst possible times by buying high and selling low and taking on too much debt, among other blunders. But Blankfein's point should be taken to heart by investors: If you can find a strong business with a history of strong returns and a capable and focused management team, you should stick with it for the long term.
