A Brief Introduction to Skeptical Investing
To understand why skepticism is so important when investing, it helps to mentally replace the word “investing” with “buying a financial product”. The act of buying generally puts you at a disadvantage similarly to investing: both involve outlaying money which has obvious value, for something which has fuzzier value. Thus the phrase “buyer beware” - or “caveat emptor” if you’re fancy.
But how are we to “beware”?
By asking questions. A lot of questions. But don’t worry, this isn’t as arduous a task as it might sound. Many questions can be answered almost immediately with little effort like “Is this deposit protected by FDIC insurance?” or “Is this brokerage a member of SIPC?” or “Is this company and the securities it issues registered with the SEC?”.
Where things can get more complicated is where you get to the bigger, more variable questions like “What do they stand to gain by my participating?” or “Is the anticipated return a sufficient margin above the risk-free rate to justify the added risk?” or “What happens if they go bankrupt?”. Sometimes the fund or issuing company doesn’t seem to want you to know the answer. I have spent days going back and forth with customer service, trying to suss out the specifics from their vague documentation. Don’t accept vague anything; make them say it, somewhere.
Is this really necessary?
Yes, because those of us who are not trained financial professionals are also the ones who now bring most of the money to the table1. Our societal push away from collectivist pensions towards the aptly named Individual Retirement Account means we are increasingly on our own, like sheep who decided against flocking and instead wander independently. So when a wolf comes to sell you a structured note containing some complex arrangement of debt and equity derivatives, will you say yes or no?
In an interesting escalation to this situation, the last 10-years have brought several new regulatory changes that have made it easier to offer retail investors private placement opportunities as well as some more esoteric asset classes. While many of these new regulations are a net improvement for us little fish, some of the resulting offerings include securities that are novel, complex, and whose implications for things like bankruptcy claims and liquidity crunches are not at all straight forward.
Oh, and I realize I haven’t mentioned crypto yet. Suffice to say, at least the wolves mentioned above have registered their securities with the SEC and ostensibly follow the relevant rules. Perhaps crypto will gain some regulatory safety nets in the future, and perhaps if the Fed succeeds in waking from its fever-dream of negative real interest rates we can even see a less speculation-heavy blockchain ecosystem grow up and thrive. Until then, I just have too many unanswerable questions to get involved.
Okay, let’s wrap this up.
In a few words, how can you be a skeptical investor? First, ask explicit questions and demand explicit answers. Then, avoid the things you can’t understand. And finally, always remember that you are buying something.
And that means beware.
Disclaimer
While I love learning about finance, I am not a financial advisor and my writings should not be taken as financial advice. The content on this website and any email newsletters thereof are for educational purposes only and merely cite my own personal opinions. As I may make mistakes in my writing, always conduct your own research and, if necessary, seek the advice of a licensed financial advisor. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing.
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Per the World Economic Forum, “The average individual now has a growing influence, with everyday investors accounting for 52% of global assets under management in 2021, which is expected to rise to over 61% by 2030.”