Right about now millions of investors are wondering if there is a way that they could be invested, and take some risk, but not have all of the downside that the market has recently offered. And of course, such ways do exist. The problem is that each of them requires the sacrifice of some potential upside at some point in the future. Hedging, insurance, diversification, balanced funds – all require the giving up of a portion of tomorrow’s gains in exchange for increased stability today. This is acceptable. You make your decision about these trade-offs as a matter of degree – how much less?
Intuitively, we all understand that this trade-off is necessary. It’s just how things work. But that doesn’t stop us from believing. What if I could have it all? And there will always be someone waiting in the wings to capitalize on this belief, to offer us something that we otherwise know should not exist: Reward without risk. The upside without the downside. This is, of course, the most desirable thing on God’s green earth. The Holy Grail. The Golden Fleece.
And why shouldn’t you have it? You’re rich. You are successful. You deserve it. Average returns are for peasants. The unwashed masses in their Chevy Traverses and their basic IRAs. That’s not for you. You’re better than that. Smarter. You’ve worked harder. You deserve the best. Give me the good shit. Where I make all the money but don’t risk anything in return.
Don’t bother looking, It will find you. People who sell it will find you. That’s their job. I know these people. They know exactly what they’re doing. And once they’ve identified you they will prey upon your every weakness. Not only will they convince you that this is how the “real” wealthy people invest, they will set an artificial deadline for you to get the money in to them. The fund is closing. The manager is not taking any new accounts on after this quarter. Previous investors are claiming the last available slots. Except this slot. It’s yours if you want it but I need to know now.
It’s like a spot on Noah’s ark. It’s a lifeline.
Do you really want to be fully exposed the next time the market falls apart like this? This is what they do. They ask you questions that they already know your answer to. By getting you to say it out loud they win. You’re done.
And of course, this sort of investment strategy does not actually exist. Even though you know this intuitively, empirically, sometimes you still need to find out the hard way. No amount of book learning or blog reading could ever rival the substantiation one gets from actual life experience.
There’s a new show on Netflix called Bad Vegan. It’s a true story. An otherwise successful business owner, who owns a restaurant called Pure Food & Wine, falls for a man promising her and her dog immortality. She marries him, then he drains her bank account and ruins her life. Systematically.
She’s not an idiot. It’s just that he’s come along with something she really wants and has done a pretty good job convincing her it exists. But these types of scams require a willing participant. The victim has a part to play. He did some of the work but her brain did the rest. Manipulation takes two. That’s how this stuff works.
Not all of Bernie Madoff’s victims were delusional. Most were just ignorant of the impossibility of risk-free reward. And then a small handful of them weren’t and, as professionals, should have known better.
As you’re reading this, someone is hard at work in a lab somewhere cooking up the next big idea in Upside Minus Downside technology. It might be an ETF. It might be a hedge fund. It might be a structured note. Who knows what form it could take next time?
The details will change, the wrapper will seem revolutionary, but the underlying idea will be a story as old as time. And it will captivate the minds of some of the most intelligent people around. Doctors, lawyers, bankers, brokers, scientists, builders, politicians. None of us are completely impervious to a story that good.
Under the right circumstances, we will convince ourselves of anything.