The Value of Information and Advice

It is always quite amazing that every time the markets go through one of these periods of upheavals, investors learn little from them. People seem very content to go ratcheting from bubble to bubble, blithely unaware of the consequences. As information becomes more accessible, transaction costs decline, and an investor's ability execute trades becomes easier, this problem has become worse.





What prompted me to blog about this today was an article in the Personal Journal section of the WSJ. It referred to a product being referred to a reverse convertibles. As with most items in the investment world, I've seen the term reverse convertibles applied to other, not so similar, products. In this instance, they are referring to a bond sold primarily to individual investors that provides an above market coupon payment. The issuer is usually a bank, investment bank, or a special purpose vehicle (not like the ones that have gotten banks and others into trouble), the maturity is generally, but not always, a year or less, and the bond's return is tied to the performance of a single stock. Basically, if the stock stays above a "barrier" level set at the time of the pricing of the reverse convertible (usually some percentage, say 20%, below the current stock price), you receive the coupon promised plus the initial investment at maturity. If the stock breaks the barrier price, then you would receive the coupon promised and the number of shares in the stock that the initial investment represented (hence the term convertible), regardless of where the stock is priced at the time of maturity of the bond. I have attached the table (above) from the WSJ for more clarity.



The point is not to denigrate reverse convertibles but to make a point about investment information and advice. This product can be appropriate for some and not others. Labeling it as a "CD alternative", as one firm in the article did on the basis of both of them being an interest bearing instrument, is disingenuous at best, but it highlights the kind of advice unsuspecting investors may receive. A simple rule of thumb is that if the person trying to get you to invest in something can't explain it to your satisfaction, like Nancy Reagan, just say no. It still may be an appropriate investment, but find someone who knows your circumstances, your goals, your risk tolerance AND can explain it. Ultimately, you are in charge of your own finances. Even if you turn control over to someone else and they don't serve your best interests, the buck stops with you.

However, what if the information, explanations, and advise sound plausible? Don't be afraid to get a second opinion on your investments and investment strategy. I don't mean just searching the Internet for validation or further description. As mentioned in the first paragraph, technology and the Internet have opened up a vast array of options to the investor, but just having information doesn't mean it is understood or should be acted upon. I'm sure I could find information online how to perform bypass surgery, but it doesn't mean I should do it or could it myself. This, of course, is an extreme example, but history is littered with the stories of people that turned over tremendous sums of money to people the barely know to invest in things they don't understand. If you were going to have surgery, unless it is an emergency, you would most likely get a second opinion. Feel free to to that with your money. This will most likely cost something, even if it is just you time, but it is well worth it.

PS: I know the old adage, "You get what you pay for." On that basis, coupled with what I wrote above, why should anyone listen to me? I'm not charging for this information, so how good is it? Here is my response: I'm not providing specific information (buy x, sell y), I'm not selling a service (yet), and I'm not even making any ad revenue (my astute readers don't click on the ads). The point of this is to shed light on an opaque area of the investment world to most people, the fixed income market. In 20+ years of being involved, I saw many people placed in investments that probably weren't appropriate, given the circumstances of the individual. Wall Street generally ignores the individual fixed income investor. With all of the turmoil surrounding fixed income markets today and all of the bad/mis-/inappropriate information out there, especially on TV, I try to explain market happenings and put them in perspective for readers. However, like any advice, you can do what you want with it.