Sunday, April 26, 2009
In sticking with this weekend's behavioral theme that started with yesterday's video, Barron's had an article about the shadier side of the investment newsletter business. The reason shady newsletters, pump and dumpers and the like exist is because people are greedy. If there was no greed to prey on there would be no investment scams. The stock market, hopefully, is a place to get rich slowly. Occasionally you or someone you know may luck into something that makes you rich quickly but that is unlikely to come from a newsletter, message board or unsolicited email.
In general, people seem to have a difficult time understanding the risks that they take. If you put 1/4 or 1/3 of your money into something that is not cash or a treasury product you are taking an enormous risk. Even if nothing bad happens you are taking the same risk nonetheless. An example of this that I have used before is with Amazon.com (AMZN). If you put 100% of your portfolio into the stock at $1.48 on June 27, 1997 and sold it Jan 11, 1999 at $92.31, was the risk you took any different than the person who bought your shares from you with 100% of his portfolio who then rode it down to $6.08 on October 2, 2001?
The risk is of course identical but the result different and only one of the two investors had to deal with negative consequences. Too many people take this type of risk. On a more realistic basis too many folks think nothing of putting 20% in something that they don't think can blow up. Anything can blow up, anything. Owning something that does blow up is probably beyond your control but how much of that blown up thing you own falls squarely on you.
I would call what happened to the Macquarie Infrastructure Trust (MIC) as a blowup. At a 2-3% weight it is the sort of thing that will literally be forgotten about. Had it been 20-30% it would have been ruinous.
Unrelated, there is a car parked at the bottom of our hill. It is a very cheap Mercedes and the license plate says SPENDZ. Do you wonder sometimes how we got to where we are with all of this financial mess? Well I think the person who drives this car is the epitome of what is wrong. They could have a whole lot more Toyota for less money than they spent on the Mercedes and they enjoy spending so much that they paid extra money to the DMV in order to proclaim it to the world.
This takes me back to Nassim Taleb's appearance on Squawk Box a few weeks ago when he shared his grandmother's financial advice which was to have a lot of money in the bank and not have too much debt. Children know they should save and not have too much debt yet somehow something happens as people become adults and they make poor decisions. This is true of people in my family, my wife's family and probably somewhere in your family too. Who thinks living below their means is a bad idea? Who thinks living beyond their means is a good idea? I suspect that the problem is not that people set out to live beyond their means but that many who do don't realize it.
I think these sorts of behavioral things (spending too much, saving too little, letting greed get the better of you, panic selling, panic buying) do far more damage than the market ever does.