Archeologists say the oldest known fishhooks date back 23,000 years. They have no idea when one person first sold another one a fishing lure. But ever since then, it has been a truth that fishing lures are designed to catch fishermen, not fish. A useful corollary is lurking just beneath the surface.
Recently the Wall Street Journal wrote about a narrow investment sector that was getting flooded with money by investors starved for yield. ‘Direct lending’ allows investors to take on the role of lending money to middle-size companies. The article made the point that the flood of money had reduced yields as well as the safety of the loans—perhaps investors should look elsewhere.
As if on cue, we immediately received an email about a direct lending strategy ‘formerly available only to institutional investors.’ It is said to be an innovative way to generate current income.
After years of near-zero interest rates and lingering fears about the stock market, who isn’t looking for an innovative way to generate income—particularly with a strategy formerly available only to institutions?
Clearly, investment products are designed to catch investors, not investment returns.
Behavioral economists have amply demonstrated how prone we humans are to make irrational decisions—to do the wrong thing at the wrong time. The bane of investing is the tendency to buy in euphoria near the peak and sell in panic near the low. The crowd seems to miss on the timing, time after time.
You know our principles include the idea of avoiding stampedes. We know that going against the crowd can be rewarding—our approach is contrarian. When something we are doing becomes popular, we need to think about doing something different. And if everybody else is buying some sector or product, we are likely to be suspicious of it.
Market history is full of products that attracted lots and lots of money, but little in the way of returns. It is much like sporting goods stores full of lures that catch fishermen, not fish. Clients, if you would like to talk about this or any other pertinent topic, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Structured products typically have two components; a note and a derivative and a fixed maturity. They are complicated investments intended for a “buy and hold” strategy and offer protection from downside risk in exchange for forgoing some upside potential to achieve that protection. Principal protection may vary from partial to 100 percent.
Investing involves risk, including possible loss of principal.