Another Risk for Investors: Being Too Clever

By Brad Thomason, CPA

 

In our office we refer to certain situations as being cases of the “Engineer’s Problem.”  They happen in those moments when you look at something that is not working the way you want it to, and after a minute (perhaps in which you squint your eyes a bit, and rub your chin), you start nodding a little and say, “I can fix that.”

The Engineer’s Problem is so named because of the understanding that could fix something and should fix something are not the same thing.

In the history of business there have been countless times when well-meaning problem solvers launched themselves at a solution which, while technically possible, was anything but efficient or even close to the kinds of lengths a sane person would go to in pursuit of a particular goal.  Sometimes making x happen is simply too complicated, too time consuming or too expensive.  Or all of the above.

The Engineer’s Problem sprang to mind the other day while reading a piece in Baron’s (“Four Stocks With Dividends That Could Double,” in the 2/24/2014 edition) which suggested that if an income investor wanted to own stocks that had dividend yields of 2% to 4%, one way to do it was to buy stocks yielding 1% or 2% today; because if those companies do well for the next 5 years or so they might increase their dividends, maybe by as much as double.

That seemed like a pretty indirect route to the prize.  With a whole lot of maybes and mights thrown in along the way.

Here’s a thought?  If you want to earn 2% to 4%, why not just go ahead and buy something paying that today?  Or better yet, why not look into something which pays even more?  There are plenty of alternative assets, especially in the various corners of real estate, which pay that and more.  Many of them, in fact, at much lower risk levels than the stock market.

Furthermore, when you consider that the vast majority of US investors are over-weighted in stocks to begin with (since the general – though flawed – perception is that the only other places to put your money are bonds and CDs), a little diversification probably isn’t going to hurt.  Even if they don’t want to move out of stocks altogether.

The point is this:  we humans are pretty good at figuring out twisty-turny pathways to get to where we want to go.  As a species, we’re pretty clever.  But sometimes that’s not a good thing.  When we reject a perfectly good straight-forward solution to get from point A to point B, in favor of something that is convoluted and maybe not even a sure thing, we’ve become too clever for our own good.

Investing is about deploying capital to get a return.  If an investor needs a specific return, and there’s something available that will pay that return (or more), where is the logic in buying something else on the grounds that some day it might pay the necessary return?  Do you want to get to brag about how smart you were in seeing into the future?  Or do you want to earn the necessary yield, starting tomorrow?  Because a lot of times you have to pick one or the other.

Next time you are considering a new asset to invest in, check yourself to see if you are in “clever mode.”  If so, you might find that a comparatively simple alternative might have much better chances of actually getting you what you want.

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