What Investors Really Want

What Investors Really Want is the title of a book I’m going to start reading. It got endorsements from some people I respect: John Bogle, Burton Malkiel, and William Bernstein. That’s always a good sign.

Before I read the book, I’d like to answer that question. What do investors really want?

Getting in on a high flyer early

How many people are kicking themselves for not buying Apple stock five years ago or even a year ago? Or the stock of Chinese Internet search engine Baidu when it IPO’d? As recent as January 2010, Apple was $210 a share; Baidu was $41 a share. Now Apple is above $300; Baidu is above $100. Next time you hear something is already "priced in" take it with a grain of salt.

Investors really want to get in on a winner early. In order to catch the next winner early, they scour the Internet and the library for "investment research." I can’t imagine how much money and energy are spent on this endeavor.

Cash out before a crash

This the mirror image of the previous desire. If investors can’t catch a winner early, they at least want to get out before a big crash. Investors don’t mind small bumps — those are buying opportunities — but if a major crash is coming, they want to get out of the market and preserve what they already have. These investors are always on alert level Orange, watching out for the next crash.

I don’t blame them. Why let your hard earned dollars crash and burn? If I know a big crash is coming, I’d get out of the way too. If I know.

These two wants can be summarized as know the future, otherwise known as a crystal ball or a time machine. Investors really want these devices.

A high interest CD

Some investors are not as greedy. They heard that the average stock market return was 10% a year since 1926. If there’s a CD that pays 8% a year, every year, they will be willing to give up the upward potential and go for that 8%. It doesn’t have to be 8% a year all the time. Sometimes 7%, sometimes 9% is fine. Heck, losing 1% once in a while is OK too, but don’t ever lose more than that. Only if Madoff was legit …

It’s really a shame investing doesn’t work that way. So many people try to tell the future but you are never sure who’s more reliable. Some say this is going up; some say it’s going down. It’s really hard to sort it out! Anything that comes with a guarantee pays so little. If it pays slightly higher, you start worrying about who’s making the guarantee.

I’m an investor. What do I want? I want a product of this latter type. In the retirement savings world, it’s called a Cash Balance Plan. Here’s my offer:

Every year I invest a fixed amount, or make it an inflation-adjusted fixed amount, for 30 years. You hire whatever experts you need and invest in whatever you see fit — stocks, bonds, gold, oil, China, Brazil — I don’t care. At the end of 30 years, you guarantee to give me a lump sum that comes to a return of 8% a year, or better yet, make it inflation plus 5% a year. If you are able to make more than that, you keep the rest. If you come out short, you make it up to me.

If a company comes out with a product like this, I guarantee there’s a huge market for it. There’s a good reason nobody is offering this. That’s a topic for another day. It doesn’t stop me from wanting it though.

OK, enough of what I think investors really want. I will go read the book now and see what it says. You are an investor. What do you want?

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Comments

  1. enonymous says

    well, when I got TIPS at a real YTM of 3+ % that was really what I wanted, so I switched from the fund to the actual TIPS.

    I think inflation + 5% is quite greedy, but inflation + 3% would be just fine.

    I wish I had money back when I bonds hada fixed rate over 3% – that’s what I want again, without the purchase limits.

  2. TFB says

    enonymous – Me, greedy? Inflation + 3% was obtained with 100% bonds some time ago. With the liberty to invest in stocks, commodities, emerging markets and all, inflation + 5% should be achievable over the long term, no? Anyway, nobody is offering even inflation + 3% right now.

  3. Sammy_M says

    TFB – it seems the problem with your proposed product is the credit risk. And the provider would have all the incentive to just roll the dice with your money. If the right number comes up, all is good. If the wrong one comes up, they file bankruptcy and your retirement is shot.

  4. TFB says

    Sammy_M – That’s where the FDIC comes in, right? Note I said high interest CDs. Banks rolled the dice on real estate loans, didn’t work out, then surrendered themselves to the FDIC. To limit such occurrence, FDIC regulates them, examines them, and charges them an insurance premium. It worked out very well for the depositors/investors.

    For such a product, I’m willing to give up liquidity. I’ll be OK with no withdrawals allowed until the final maturity date. I’m also willing to make a firm commitment for the future investment dollars (forfeit my balance if I can’t cough up additional dollars in any year). Still no deal?

  5. enonymous says

    inflation + 5% requires risk

    if it was offered, every single pension fund would pile into it (after all, their obligations for the future are known and fixed)
    if it was truly backstopped, the amount of money in it would take in would maket it impossible to backstop
    and of course since it was inflation linked, even printing wouldn’t work

    the TIPS/I-bonds with 3% real yield were so nice because they weren’t 5% but their yield was nearly ironclad – risk of nearly zero, known yiled -as good as it gets
    5+% real would be truly incredible…

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