I was just looking at the ads on my site and on another couple of finance sites and was inspired to post this. On my site (although I have been proactive about rejecting ads) and others you will see ads for peer-to-peer lending services, privately traded real estate investment trusts, initial coin offerings, tax liens, gold, oil and gas leases, etc…
Most of these have serious fee, tax, or other short comings. This led me to think, “Maybe good investments are the ones that no one is selling?”
Of course, that is a bit of an oxymoron. In order to buy something, someone has to sell it to you. In this case, I mean sell as in “promote.”
I think one example of an investment that is not promoted is the series I Savings Bond. If you are unfamiliar, I discussed these on this site before, in the context of year end moves. See Year End Moves: I Bonds.
Currently I bonds are yielding 2.58%, so you earn about 30 bps less than the current 10 year yield, and the rates float. They also have some other neat features and could serve a number of functions in a portfolio, including holding emergency funds (they have a 1 year minimum holding period, but if accumulated over time, that should be no problem).
When you consume financial media, you are not going to see anything about them. You will, however, see lots of advertisements for bond funds or certificates of deposit with lower yields, more interest rate risk, and no tax deferral.
When you go to Treasury Direct to buy them you will see a fairly terrible website, with a very circa 1997 user interface. You can only buy them in electronic form and you have to remember a numerical, assigned, account number to log in. You will never see a nice glossy ad with a link and easy ordering. Why? No one is incentivized to promote this investment (excepting a future WWII type bond drive).
“Stuff” is Sold
The larger point is that if someone is promoting an investment on CNBC or whatever, they are likely “talking their book” and we should be skeptical. That includes readers of this blog, when I discuss stocks where I have a position by the way. Even if I am consciously working to be open and honest, I could still suffer from errors in cognition due to my vested interest.
I was going through some of the disclosure documents for one of those new privately traded real estate investment trust services this weekend. The documents discussed a number of conflicts of interest between the funds and the external manager/promoter. In addition, the amount of many of the operating expense reimbursements to be paid to the manager were not clear (and will really require observation in practice to evaluate). This has not prevented multiple companies in the space from coming to market to raise large amounts of funds.
The larger point, I think, is that we should be focusing primarily on opportunities where the benefit from promotion are as small as possible. This would immediately rule out almost all IPOs (and ICOs). It would also absolutely rule out that fantastic gold investment that the perma-bear, who has been wrong for a decade, is now pitching on the most recent CNBC web show.
It would definitely rule out that variable annuity with a 200 page summary document and which is paying your advisor a huge up front commission. This is even if he tells you its simple, and you can get your money back at any time.
Spin-offs, recapitalizations, and post-bankruptcy securities, however, would be on the menu. You could probably have included TARP warrants when the government was exiting its positions (or maybe after the press coverage died down). Maybe “fallen angel” (newly junked) corporate bonds would also qualify. I suppose you could really include many areas where capital is fleeing, especially if there is forced selling.
Conclusion
I am thinking of distilling this observation into an item on my mental investing checklist. Perhaps something like, “Why does this opportunity exist? Who gains from promoting it? Am I providing liquidity that is needed and valued, or assuming risks that others are likely to have misjudged?”
In sum, I think we need to be on our best guard when dealing with promoted investments.