The 3 Little Words Finance People Find So Hard to Say

The fear of appearing ignorant can be a dangerous thing.

May 11, 2014 at 11:00AM
Mouth

Recently, co-founder and CEO of The Motley Fool Tom Gardner interviewed Michael Lewis, the author of Flash Boys. Before the two discussed the issue of high-frequency trading in depth, Lewis made a comment about ignorance. He noted that, particularly in the world of finance, investors are quite averse to admitting to a lack of knowledge.

He wasn't talking about Mom and Pop investors, either. Big finance's heaviest hitters, the CEOs and managers of hedge funds and other entities are the biggest offenders, said Lewis. Gardner pointed out that author Will Thorndike had taken a look at eight high-performing CEOs over a 20-year period, noting that the common characteristic among them was that they were all industry outsiders.

With no reputation to uphold in the new sector, these leaders were free to learn from others, and say what insiders – particularly in finance – are loathe to:

"I don't know."

An affliction that can affect anyone
This theory makes sense, and explains a lot about the financial crisis. As Lewis says, no one really knew what subprime collateralized debt obligations were, or if such CDOs were truly worthy of AAA ratings. New financial instruments were being created at the speed of light, and no one wanted to admit that they didn't understand much about them.

This mind-set afflicts consumers of financial products, too. Certainly, if more subprime borrowers had understood exactly what they were getting themselves into during the run-up to the housing crash, they would have been up in arms. Asking questions and doing some in-depth research may have saved countless lives from ruination.

The same goes for smaller investors. If victims of Bernie Madoff had asked more questions, might they have been spared their fate? It seems likely. In an interview last June with MarketWatch, Madoff identified a red flag: If something sounds too good to be true, it is. He noted that he was able to continue with his scam for so long because no one ever questioned him.

He drove home the concept further:

Wall Street is not that complicated. If you ask an average hedge fund or investment firm how they make their money, they won't tell you. Most people think it's too complicated and they can't understand it. You should ask good questions and, if you don't understand something, have your accountant ask questions.

If you don't understand something, then don't invest in it. People asked me all the time how did I do it, and I refused to tell them, and they still invested with me. My investors were sophisticated people, smart enough to know what was going on and how money was made -- but still invested with me without any explanations. Things have to make sense to you. If you don't understand the investment, don't put your money there.

Were Madoff's sophisticated clients afraid of being considered stupid? Possibly. After all, many were already rich when they opted in with Madoff, and, as such, were probably used to being thought of as knowing everything, as Lewis suggests.

Studies have shown that everyday investors often suffer from the inability to admit ignorance, as well. Investors invariably fail at investing by using emotion, rather than information, to guide their investment thinking. They buy when a stock is hot, and the price is high – then sell in a panic when the price is falling. While the average equity mutual fund returned 8.18% over a 10-year period ending last December, average investors made only 6.52%.

Markets have good years and bad years, of course. Long-term investors understand this, and generally do better because of it. They've done their homework, because they know that performing due diligence is vital to success in any endeavor, and investing is no different. To succeed, read, learn, and ask questions. And, if you don't understand the answers, don't be afraid to say so.

Warren Buffett -- the king of acknowledging his ignorance -- just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers