When your spouse or other close relation tells you this, pay attention. Chances are there’s something important going on. But if you’re evaluating an investment and the seller says this, grab your wallet. Either they’re pulling one over on you, or the investment idea is too complicated for its own good.
Over the past decade dozens of companies have maintained that their business was too sophisticated for the average person to comprehend. Enron, WebVan, Lehman—they were all touted as a new way of doing business. But famous investors say that you should look to invest in firms that any idiot can run, because eventually one will! If the business plan can’t be written in crayon, it’s probably too complex.
A big part of the Financial Crisis was the abstruse nature of the instruments sold by Wall Street. Unsound mortgages were put through some kind of Rube Goldberg financial structure to try to spin straw into gold-plated AAA bonds. When this failed, it took the economy down with it.
When family or friends tell you that you don’t understand, it’s time to listen harder. When someone in the market says the same thing, it may be time to walk away.
Douglas R. Tengdin, CFA
Chief Investment Officer