According to a recent NewYork Times report-the fire warning system at Notre-Dame took dozens of experts six years to put together, and in the end involved thousands of pages of diagrams, maps, spreadsheets and contracts, according to archival documents found in a suburban Paris library by the Times.
The result-a system so complicated that when it was called upon to do the one thing that mattered-warn “fire!” and say where-it produced instead a nearly indecipherable message.
Perfectionism is a kind of “Ego” state for most of us.
Realisation of own competence is an even bigger challenge.
It is not necessary to create a masterpiece to be a master.
However the urge to display “competence” and be commended as a master is a need that complicates human thinking.
For majority of investors discipline of saving, simple thought process, even simpler asset-allocation and the simplest of product solutions are enough to meet their financial goals.
However instead everyday we see the following play-out:
- Mortgage backed securities;
- Collateralised mortgage obligations
- Collateralised debt obligations
- Asset backed securities
So on and so forth.
In the name of capital protections; hedging; higher yields, life is made complicated on a regular basis.
Most of the time these products end in the hands of investors who have no recognition of what they are getting into and there is no appreciation of underlying risk.
What are the drivers of this product selection:
- I bought something unique-I am “SMART”
- The “In-THING”
Here is a chart that’s really revealing:
In-fact in 2008, Warren Buffet had put in a wager that over a 10 years net of fees hedge funds shall under-perform index funds.
Lo & behold, 2008-2016, hedge fund returned an average of 22% against 85% for the s&p500.
Closer home all categories of exotic funds-real-estate structures; REIT, hedge funds have not only not been able to justify the high fee and are in-fact illiquid to the extent that investors have been waiting for exits for years.
Lot of funds have extended tenure with one fund even transferring illiquid securities to investors personal DMAT account to close their fund.
While I can go on, lessons for general investors are simple:
- Create a plan;
- Have clear goals;
- Recognise your risk-profile;
- Save regularly with discipline and invest as per your asset allocation
- Find simpler product instead of being driven by what’s in or exotic;