Does it pay to be cynical?
When you study markets and finance it’s easy to become pessimistic about human nature. Audited financials get manipulated to maximize management bonuses. Market oversight officials are lenient when they examine big brokerage firms, hoping to secure their next job. And investment managers themselves use their clients’ business to reward or punish various brokers—to say nothing of the Ponzi-scheme Madoffs who make off with the money.
The rational response to such behavior would seem to be cynicism: suspect everyone. It’s easy to echo Lily Tomlin: “No matter how cynical you become, it’s never enough to keep up.” And the daily news always provides fresh examples of fraud and malfeasance.
But you can’t live—and invest—that way forever. Cash stuffed in a mattress loses real purchasing power at the rate of 2% per year; gold is cold comfort when you need to buy anything; bank deposits pay almost nothing. A risk-free life is a return-free life. Peaks and valleys are hard to traverse, but they provide a beautiful landscape.
Shakespeare’s Sir John Falstaff is one of his most appealing characters. Fat, vain, boastful, and cowardly, his worldly-wise counsel leads the Prince of Wales astray. He embodies a kind of lusty distrust—repudiating honor on the eve of battle as nothing but an empty word. But he is ultimately repudiated when Prince Hal becomes King Henry V.
A cynic knows the price of everything and the value of nothing. He may want to be nobody’s fool, but that fools no one. The world really works through trust. Trust reduces financial friction and makes growth possible. If we sense dissembling among our financial partners, a better approach is captured by the old Russian proverb: trust, but verify.
Douglas R. Tengdin, CFA
Chief Investment Officer