Investing, Oversimplifications ...
and the Mutual Funds!

The Albanians and the Romanians angry at being swindled in the "pyramid schemes" that swept their newly free market countries, can teach us a lesson about the dangers of oversimplification in investing.

These poor people turned the complex workings of a free market into:

"We can all be rich under capitalism!"

The current crop of mutual fund advertisements is turning the complexity of equity investment into:

"We can all become rich with AAA Funds!"

By the time investing has been reduced to a simple slogan, the prudent keep their feet firmly grounded in cashflow reality!

After the fact, investment manias seem obvious. During the heady period before the speculative collapse eventually occurs, few words of critical analysis are ever heard or even wanted. A necessary condition of overvalued assets is an iterative process of gross oversimplification. This is a technique borrowed from the "Art of Propaganda."

Propaganda:

1. The spreading of ideas, information, or rumor for the purpose of helping or injuring an institution, a cause, or a person.

2. Ideas, facts, or allegations spread deliberately to further one's cause or to damage an opposing cause; also: a public action having such an effect.

Judging from the huge sums that many people have invested in these schemes, most of them seem to have been eventually caught up in this investment mania.

The question is why? Why would such poor peasants flock to put their life savings into such a scheme?

Greed is the obvious motivation. As well as the delusion that accompanies mass, human activities. Without dwelling on the psychology of crowds, an easy-to-understand slogan or sales pitch is a vital ingredient.

The wartime propagandist simplifies the intricate grey complexity into the simple black and white of "THEM AGAINST US!"

The mobsters running the pyramid companies distilled capitalism into "WE CAN ALL BE RICH!" Just pass the cash for this worthless piece of paper!

So what of our late mania of "mutual" and "equity?"

A well considered investment into the securities of a good company is beyond dispute. That good money managers exist and can deliver above market returns is also persuasive. That well-run companies with rising cashflows boost their share prices is a fact. But what about this endless flow of mutual fund advertising?

Are those advertisements curing the burning itch of the "Investment Stupids?" But to me the simple pitch is unmistakable: "INVEST WITH US AND YOU CAN BE RICH!"

The problems with this gross oversimplification are obvious. Economies exist primarily to distribute wealth. Not everyone can be rich!

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