17th January 2011 by Ken Eisold
Searching for Reassurance
We worry about our financial decisions — and for good reason. Most of us are not expert in understanding the comparative advantages and risks involved in the options we face. And the choices get more complex every day. Given that, it is all too easy to place our faith in someone else, someone with a “proven track record.”
So it was sobering to read in The New York Times a piece by an investor in Bernie Madoff’s Ponzi scheme. Madoff, of course, once seemed as good a fund manger as one could find. Many well-known people invested in him. He did not aggressively promote his fund. Indeed. At times he seemed to discourage investors. But, year after year, he offered modest, steady returns – until the whole scheme collapsed.
The writer, Michael Kubin wrote that, after the initial shock wore off, “I came to see my Madoff experience as the penalty for sloppy judgment.” He now has a new attitude towards his investments: “before putting money into any deal, I have spent tedious hours vetting the managers, checking references and getting greasy and grimy crawling under the hood to understand how their business works. And today my portfolio feels like a family album; I know every piece of it in intimate detail.” (See, “The Ponzi Scheme That Changed My Life.”)
Not every investment opportunity requires such detailed inquiry, but most require more investigation than we are usually willing to give. The key is knowing how easily we allow ourselves to place our trust in others, especially when we don’t trust ourselves. Better yet is figuring out what we would actually have to do to make trustworthy judgments. Who would we need to question? What would we need to know?
The big firms are less likely to be susceptible to Ponzi schemes. On the other hand, they are less likely to give us the time we need to fully understand the choices they make available. Moreover, their profit often stems from the amount of traffic in the account, the purchases and sales, and traffic doesn’t guarantee profit or, even, stability. Their interest in our investment may not be the same as ours. On the other hand, the greater danger for us is simply treating our investments like bank deposits: locking them up with someone we have come to trust — and then not following up for months.
There are many other comparable things we often prefer not to think about: life insurance, wills, disability, savings. They remind us of the threats of illness, accidents, age, physical decline, and death. A few years ago, my wife and I consulted a lawyer about new wills. With his help, we carefully thought through what we wanted to do. But, then, we put off signing the wills for a whole year. Somehow, we just couldn’t find the time.
Making decisions about such uncertain and troubling matters makes us anxious. But not acting makes us vulnerable.