CINCINNATI BUSINESS COURIER
January 9-15, 1989
Investments
By Charles D. Vaughan
Only the strong survive in the investment jungle
“Welcome to the Jungle!”
-Tarzan (to Jane), 1914
The success of the Bengals this year has given new meaning to this time honored quote. In fact, Bengalmania has turned the whole city into a jungle inhabited by funfilled denizens. There seems to be a spirit of competition in creating new ways to, color things orange and black.
This is great when done in the spirit of fun and joy. In stark contrast, the investment community seems to be competing in coloring things in murky grays and browns. The Crash of 1987 and the ensuing period of lousy earnings for investment firms seem to have accelerated the trend toward the obscure.
In pursuit of lost commissions some firms have created new products and services to appeal to the investing public. The result is a geometric expansion of investment media. The number of different types of investment vehicles is growing so rapidly that I doubt if anyone can keep up.
At the root of all investments there are really only two basic ideas. The first is ownership or equity. You can own some type of property either alone or with other people. You can use it for your own pleasure or you sell it to someone else for profit. The second is debt. You can let someone else use your property (or money which is merely a substitute for property) and charge them rent for it.
From these simple roots innumerable strange, twisted and incomprehensible plants have grown. For most investors now it truly is a jungle. Even with a professional guide and a sharp machete of experience, it is tough to hack through the intertwined vegetation of investment concepts.
It is, virtually impossible to tell the bankers from the brokers from the insurance people much less the products the offer. They are all seeking new ways to attract and keep more of their clients’ dollars. And they are, all seeking new ways to branch out into more revenue generating services for their clients. This isn’t necessarily bad. It just places responsibility on the investor to know what is being offered, and why. No single entity in the financial services business has all the answers or all the means to satisfy investor needs. Not even me darn it.
Since you are likely to be somewhat alone in the jungle, let me give you a few survival tips. First, recognize that investment for most people centers on reducing risk. That means balancing all forms of risk against the total reward. It also means diversifying enough to avoid catastrophe. Second, investment success is a long term concept. High short term performance is difficult to sustain and may actually be destructive to the long term program. Third, nothing beats steady compounding with regular, disciplined capital additions. Finally, only net results after all costs and taxes have any meaning.
With these concepts in mind, you may find these tools helpful in untangling any investment proposition:
1.) Trim it back to the roots. Find out whether you are in the position of an owner or creditor. What compensation can you expect, from whom and how likely are you to get it? When is it due and what can you do if you don’t get it? Can you get out if you want to?
2.) Can you see both the trees and the forest? Look at the basic economics of the proposition. What is the source of profit in the deal? Is it in a field that is profitable? Is it a proven or a new idea? Do you have to make history to make money? Do the people running the enterprise have the experience and track record to suggest success?
Where are you on the food chain? How much do you have to pay to get in and out of the deal? How much do the people running it take before you get your cut? Do they get theirs even if you don’t get yours? Are there any conflicts of interest? Are the people advising you to buy it the creators or managers of the deal? What do the promoters lose if it doesn’t work out?
As the trend toward more complex types of investment continues, the investor’s position will become even more difficult to determine.
We are likely to feel more and more like Dorothy in the Wizard of Oz. “Lions and tigers and bears, oh my!