To succeed as an investor, you need to disregard or at least downplay investment marketing messages, especially with new investment innovations.
Investment and consumer companies both work hard on their marketing, because it can attract customers and spur sales. But investment marketing can do a lot more damage with investments than with dish soaps, since they can make an inherently risky investment look safe.
Investment innovations like ETFs, hedge funds and liquid alternative mutual funds fall victim to investment marketing all the time.
Investment innovations that didn’t live up to great investment marketing
Consider “hedge fund investing”. The term “hedge” suggests a balanced approach, as in “hedging against inflation,” a great investment marketing tagline if there ever was one. But a hedge-fund strategy includes short-selling, derivatives trading, margin trading and other highly speculative financial maneuvers.
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Hedge-fund managers use these maneuvers to offset (or, in some cases, amplify) the risks of investing in stocks. This combination can work well for years, but the speculative element carries a hidden risk. At unpredictable moments, this risk flares up and the strategy backfires. This can turn a seemingly good investment haven into a financial nightmare.
It’s a common pattern with investing innovations that have great investment marketing. As the innovations become better known and more widely available, it quits working. Sometimes it turns from a strong performer into a guaranteed loser.
While basic hedge-fund performance faded, investment marketers broadened the product line.
Investment marketing makes unsafe bets sound like winners
In recent years, a number of well-respected financial firms launched so-called “liquid alternative” mutual funds.
The name may suggest something safe, like T-bills or other liquid investments. But these funds aim to generate income using a milder dose of risky hedge-fund strategies. When these strategies began to backfire, the respected sponsors of some liquid alternative funds did the right thing: they shut the funds down while investor losses were still modest, even though this shut off a source of fee income.
Investors still lost money, of course. But losses were far less than in earlier hedge-fund failures. That’s progress, of a sort—a little like the invention of filter cigarettes.
The next wave of investment marketing may incorporate the word “capitalism”, linked with one or more terms borrowed from or loosely associated with the environmental movement—as in “community capitalism” “sustainable capitalism”, “stakeholder capitalism”, and so on. This approach may make buyers feel better about their investments. But results will still vary, and some will lead to bitter disappointments.
The problem here is that you can’t re-make capitalism by, say, getting Monsanto to give up on gene-splicing. More likely, you’ll have to invest in junior stocks or start-ups with new ideas. Regardless of your intentions, however, juniors and start-ups are much riskier than well-established, dividend-paying companies. Juniors and start-ups can fail miserably, even when they are in areas that seem to have a lot of potential.
How investment marketing breeds excessive feelings of comfort, security and performance
Successful investment marketing tends to focus on the investment manager’s professed motives and methods, rather than on the investments themselves. But success in investment marketing simply means big sales for the product.
The outcome for investors is a separate matter. Successful investment marketing can lead to unsuccessful investing.
To succeed as an investor, you need to disregard or at least downplay the marketing message. Instead, focus on where your money is actually going. This determines how much risk you take on, and how likely you are to lose or make money.
Brokers get information from the media, investment journalists spend a lot of time talking to brokers, and company managers listen to both. A feedback loop can develop that spurs high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes.
Needless to say, lots of smart people work in the public relations and brokerage businesses. That’s why it’s a mistake to stuff your portfolio full of the latest investing innovations these people have publicized. A positive quote (or testimonial) may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, in-the-limelight stocks and investing innovations trade at a premium.
You may get the feeling that these are can’t-miss investments, and that it’s safe to buy and forget them. That’s exactly the wrong thing to do with new investing innovations. Our investment advice is that your portfolios that contain the newest investment innovations are the ones you need to watch most closely.
It’s true, you may do very well investing in these new innovations.. But when they come down, they take a lot of people by surprise, and they can fall much further than you ever thought possible.
Have you ever been duped by investment marketing? Share your experience with us in the comments below.