Financial literacy and Caveat Emptor
by George Hatjoullis
There is a well-known expression that if it looks too good to be true then it most likely is too good to be true. Nevertheless, individuals (and companies) consistently invest without due care, lured by exciting possibilities. This is their prerogative but then when it all goes wrong they invariably look for someone to blame. It is never their fault. Whatever happened to Caveat Emptor?
The latest example is the furore over the fate of holders of the Perpetual Subordinated Bonds (PSB) of the UK Co-op. Evidently the title of the bond and the fact that it would have been offering a relative high yield at the time of purchase offered no clue as to its nature. A quick search using google would have revealed quite a lot about the instrument, though without some degree of financial literacy the information is so much gobblydeegook.
A similar issue arose in Cyprus with the bail-in of the banks. It has been rare for uninsured depositors to be bailed-in but the possibility was always flagged by the name; uninsured! The interesting thing is that uninsured deposits do not necessarily attract higher interest than insured deposits. This should now change, at least in the eurozone and other nations joining the EU banking union. If it does not change you might ask yourself why you hold such deposits.
These issue have been covered at length in previous blogs. My motivation for writing this blog is an email I have just received offering an investment that, prima facie, looks really good. It offers an assurance of 7% net over 5 years. It is based on student accommodation in a top university town which I am informed has 49,500 students but only 13,000 student beds. It promises no spam, no pressured sales tactics and no obligation to commit to any investment. It continues in this vein and all I have to do is give them my details and all my questions will be answered by a team of expert professionals.
My first question would be what is the legal meaning of ‘assured’, as in ‘assured for 5 years’? My second question is the 7% is net of what? My third question is where do the 35,500 students without beds sleep now and where have they been sleeping (it is not a new university)? My fourth question is why does it specify no spam, no pressured sales tactics and no obligation to invest? Is spam, pressure and obligation the norm when dealing with this entity? Finally what are the expert professionals expert in? Who regulates them if indeed they are regulated by anyone? And so on.
This may indeed be a great investment and if anyone wishes I will forward the web address. However, Caveat Emptor and you might wish to ask the questions that I have highlighted and note the answers. The purpose of this blog is to illustrate how ‘attractive’ propositions just appear in ones inbox and how one finds oneself looking at prospects that if presented differently one might not glance at twice. Stop, think and hesitate. Critically examine what is in front of you and ask yourself some questions. No one has a magic wand in investment (and if they did why would they share it with you). This is the most interesting thing about the example that I have used. Why does it exist at all? There is plenty of money out there at very low rates for property investment. Why does anyone with such a good deal need to share it with you?
There are two strong emotions that drive bad investment decisions. The first is greed and we all understand this. However, the second is the more dangerous. It is a mixture of inadequacy and insecurity. If someone tells us that they have a great deal and we are fools for not participating then our sense of insecurity and inadequacy is touched and our brain stops functioning properly. It is better to feel a fool than to go charging in and confirm it.
There are no definitive investment guides. There is no substitute for thinking through a prospect. If you cannot be bothered or do not have the knowledge then do not invest. The trading community has many sayings which convey a lot of useful information but are more honored in the breach. My favourite is that it is better to be out looking in than in trying to get out. Opportunities are like buses. There will be another one along in due course.