Tuesday, January 25, 2011

Exploiting Economic Illiteracy

“I think it’s important for people to understand the ideas of scarcity and decision making in every day life so that they won’t be ripped off by politicians”,

“Politicians exploit economic illiteracy”

- Dr. Walter Williams.

Those were the comments that resonated with me in the recent WSJ Op-Ed,The State against Blacks; Then I got to thinking, yah, not only politicians pal!

In the article, Dr Williams, a George Mason Economics Professor, discusses how the welfare state has done more harm to African-Americans than slavery did. And that “black people cannot make great progress until  they understand the economic system, until they know something about economics”

Not to take away from Dr. Williams’ message, but I believe his statement holds true for more than just the African-American population.  I believe its imperative for investors - of all stripes - to have a basic knowledge of economics. With the cacophony of noise emanating from Wall Street and politicians pushing their agendas, many investors are tearing down the rapids sans a guide and indeed some without a paddle.

A proper understanding of the true state of the global economy is vital for investors to avoid investment land mines.

Yesterday, Mark Cuban (who incidentally made his fortune in the stock market; during the Tech bubble nonetheless), blogged in Wall Street’s new lie to Main Street - Asset Allocation:

Today, your investment advisors want you invest in things you have absolutely no fricking clue about and have pretty much absolutely no fricking ability to learn about”.

Although I agree with one half of his proclamation, I do not agree with the other. With this one sentence, I believe he highlighted one of many myths and misconceptions under which current investors toil, that 
you can’t possibly, under any circumstances possibly learn this stuff!
Nothing ensures the longevity of myths and misconceptions like a modicum of half-truth.

The misconception that economics and finance is indecipherable, is one that is perpetuated admittedly, by many in finance for selfish reasons.  While the profession may not be seen as academically rigorous as the legal or medical, it does take hard work and study to gain insight. And even then, success is not guaranteed.  

Investing is NOT a real science like physics although, the reams of academic papers with unintellligible equations, talk of Chaos Theory, Brownian Motion and Levy Flight would probably convince you otherwise.  Although many professional investors have used these theories successfully, it didn’t happen overnight and it did require some serious study and application of brain usage on their part.

Too many investors want a magic elixir that guarantees outrageous profit with no risk, either to their pocket or their brain cells. Should you invest in a 1 year 8.10% Callable Yield Note linked to the performance of the Ishares MSCI Brazil Index Fund and SPDR S&P Metals and Mining ETF? Well for starters, it would help if you knew where Brazil was. Then maybe what’s in the index and the ETF before thinking about the possible 8.1% yield.

While, I agree there is a lot of scuttlebutt floating about, as highlighted in my post, ETF Mania or: A Study in Herd Behavior, I think everyone should be investing at their comfort and education level. In The stock market is for suckers, MIT professor Andrew Lo proposes to: “license retail investors to educate and protect them”.

I’ll leave you with two quotes i keep very much in the front of my mind:

There is nothing more frightening than active ignorance.-- Goethe

There are two ways to be fooled: One is to believe what isn't so; the other is to refuse to believe what is so. --Soren Kierkegaard

Happy Trading

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