In the Old West certain salesman would travel by covered wagon from territory to territory selling oils, potions, and other elixirs. They hailed their products---which apparently they only had the recipe for—as cure-alls for almost anything that bothered the average frontier settler. It took not long for many folks back then to realize that these “salesman” were, in fact, praying on peoples’ fears and emotions to simply make a buck or two. They were quickly labeled “snake-oil salesmen,” and often run out of town soon after they arrived.
As I think through the last year or two, which included the fire sales of Bear Stearns and Merrill Lynch, the failures of Lehman Brothers and Washington Mutual, and the nationalization of Fannie Mae, Freddie Mac, and AIG, could it be that the financial services industry simply got chalked full of modern day “snake-oil salesmen” who only wanted to make a buck or two off of their clients?
Think about it. Many folks—aspiring first-time homeowners (frontier settlers in a way)—were conditioned to believe that homeownership--at whatever the cost--was one of the only ways that they could fulfill their American Dream. Thus, up from the dust, arose a group of enablers that sold people things that these folks didn’t have a chance of understanding, which didn’t even matter to the purchasers, because their emotions told them they were so close to achieving their dreams. Option-arm’s, pick-a-payment mortgages, and CDO-Squareds, to name a few were all modern day forms of snake oil. The only difference was that unlike the Old West, nobody seemed willing to run these enablers out of town.
Now that the financial system has come back from the proverbial abyss, it would seem that the resultant shakeout should have thrown a lot of these salesman out of the industry, or at least forced others to run them out of town. Perhaps this has occurred in the mortgage industry to some extent, but in other aspects of the financial services industry, these “snake-oil” salesman are as strong as ever.
Let’s take the hedge fund or investment industry as an example. Anyone who takes the time to sit down and read seminal books like Security Analysis and The Intelligent Investor, or even better, the writings of Warren Buffett, should quickly realize that investing is not rocket science. Running the basic numbers, making conservative projections, and valuing and learning about various businesses is not overly difficult, though it does require long hours of reading. What is more difficult about investing, but not impossible, is having the emotional temperament to think and do things independently, and to wait for attractive prices.
While it seems so simple, I rarely hear any investment manager explain what they do in such clear—and understandable—terms. Instead, I hear not all, but many explain that they have a proprietary market model, or that they have spent decades developing a black box that crunches numbers, or that they are currently pursuing a leveraged beta trade (whatever that is), to name a few of the forms of “snake-oil” currently being promoted. What’s more, many further purport that they are the only ones who could have developed these so-called magical tools for creating wealth. Sounds a bit like the Old West now, doesn’t it.
What is even more surprising, though, is that legions of folks seem to blindly buy into this marketing stuff without ever being skeptical. It is as if you can envision a group of folks huddled around the lunch table (covered wagon), eyes glazed over, taking in everything the salesman says as gospel. But to be fair, even if these folks are skeptical, they typically don’t ask poignant questions about what some of these managers really do. Perhaps they are scared to do so, or perhaps they just believe the purported magic of these promoters at face value.
Unfortunately, there is no sure fire way to ferret out what is snake oil or what is legitimate in the investment industry. One thing to think about, though, is that if there is something that you don’t understand after it is explained to you, ask yourself if it sounds like “magic”, and if it does, send the promoter off in his covered wagon in a cloud of dust.
You might also be interested to know that this blog was mentioned in a New York Times article, which I have linked here.
I welcome dialogue with my readers so please do send me any questions or comments you may have.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
