“You just don’t understand.”
Photo: Jeremy P Gray. Source: Jeremy P Gray Photogrophy
When a spouse or close friend tells you this, pay attention. Chances are there’s something important going on. But when you’re looking at 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. Lehman, Petrobras, SnapChat—they were all touted as harbingers of a new way of doing things. But the great investor Peter Lynch once said that you should try to buy firms that any idiot can run, because eventually one will. If the business plan can’t be written out in crayon, it’s probably too complex.
ETF Patent Diagram. Source: US Patent Office, Google
A big part of what makes people nervous about the market is the complex nature of the instruments sold by Wall Street. During the housing bubble junk mortgages were put into Rube Goldberg financial structures to try to spin sub-prime straw into AAA-rated gold. When they failed, they took the economy down with them. Now we have wacky Exchange Traded Funds that focus on cancer cures or stock tickers that start with the letter “Q.” Whatever the product is, it’s critical to know how it works.
When family or friends tell you that you don’t understand, it’s time to listen up. When someone in the market says the same thing, it’s probably time to walk away.
Douglas R. Tengdin, CFA