Stupid things investors say

Dec 07, 2014
miltons ip

Investing is a low-barrier to entry, poorly-regulated business so it should come as no surprise that many fund managers say crazy things when talking about their historic returns. Similarly, retain and angel investors prefer to glorify their returns even if it does not benefit them financially.

Recently, I have heard a number of investors refer to their ‘cash-on-cash’ rate of return. When this is specified without any reference to “the time period” it is utterly meaningless, and likely deliberately misleading. Investing is about ‘rate of return over time’. If you fail to mention the time period, you are talking gibberish, and trying to mislead. A very common retail example of the same behaviour is people talking about how much they have made owning their own home, but without any reference to the duration of the investment or its annualized real rate of return (after inflation).

One of the most significant trends of the past generation has been the ‘democratization of capitalism’. What I mean by that is that we are all, by necessity, required to try to ‘make money from money’ (which is the essence of capitalism). We are all investors now. Ands everyone has much more stake than ever before in a) saving, and b) investing these savings successfully, for retirement – and all taxpayers, as guarantor of various public sector pension plans, also have a much higher stake in understanding the liabilities that flow from weak investing returns. Sadly, the financial literacy of most people – including of most people who are nominally “investors” – has not kept pace with this transformation. We need the financial equivalent of mandatory high school – a mass education program that improves financial literacy among all adults.

Neil

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