Are we wired to believe in stories?
Our brains seem to be programmed to connect discrete events and fashion a narrative around them. This has been known for thousands of years. How else to explain the durability of the classics, from Homer to Homer Price? And if for some reason we can’t connect the dots, we’ve lost a part of ourselves.
But there’s a downside. Since forever, hucksters and charlatans have been spinning stories attempt to separate us from our savings. As an investor, I’m constantly hearing about a small start-up or expanding mid-sized business that just needs a little capital to expand into the stratosphere. And just maybe they will. After all, Dell and Apple did start out in that mythical garage.
It takes sound judgment to distinguish between the next big thing and a just-so story. That comes from experience with your eyes wide open as to the tell-tale signs of a fairy tale.
One of those signs is complexity. Esoteric deals often mask the underlying economics. Life settlement loans or obscure tax-deferred annuities may have a footnote on page 67 of the document that keeps sellers out of the pokey, but the deal’s structure frequently guarantees cheap funding for the issuer, high commissions for the seller, and a lousy deal for the investor.
In investing, skepticism is your friend. It’s a lot easier to protect value than to earn back a loss.
Douglas R. Tengdin, CFA
Chief Investment Officer
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