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Best. Investment. Ever. Or Is It?


Best. Investment. Ever. Or Is It?

I’m about to offer you the best opportunity in the history of investing. I promise you that it is going to be absolutely, completely, totally, can’t-miss awesome. I’m going to let you buy some of my Legos.

Before you rush to the phone or your email, let me tell you why. Early last year, Lego discontinued set number 9516, "Jabba’s Palace." The reason, allegedly, was that it contained racist undertones (and indeed, one Muslim group in Austria had complained that it depicted offensive stereotypes, but Lego said that had nothing to do with the decision to discontinue the set). Obviously, the fact that the set has been discontinued and the potential controversy surrounding exactly why it was discontinued make it a collector’s item.

Seeing an opportunity, I rushed to my computer and bought a set on Ebay.

Now, here’s the deal of a lifetime. I will sell you my set of Jabba’s Palace Legos for $500. I’m certain that they will be worth $1000 in a year. I accept cash, checks, Paypal, Amazon Payments, and if you want me to I’ll even find a way to take Bitcoin (my thoughts on Bitcoin and monetary institutions are here).

See? It’s the deal of a lifetime. For a measly $500, I will sell you an asset that will double in value by this time next year.

Be Wary of "Can’t Miss" Investments

If you’re wise, you’re balking at my offer even though I have reliable (?) credentials because it sounds a little bit too much like a late-night-TV get-rich-quick scheme or a high-pressure pitch that you might hear on a home shopping channel.

It’s possible that I’m desperate. Maybe I need $500 right now to fix my car or bury my father, like the guy in the Lynyrd Skynyrd song. Maybe I’m crazy, like a used car salesman who just has to cut prices to get these cars off the lot. In all likelihood, however, I’m trying to pull a fast one. A few minutes of reflection will show why.

First, if you look up the set on Ebay or Amazon you’ll see that people are now asking anywhere from $90 to $186 for the set. While my Legos have appreciated a little bit, there’s no way they’re worth $500.

Jabba

Second, if I genuinely, honestly, in my heart of hearts believed that the Legos would be worth $1000 in one year, I wouldn’t be offering them to you for $500 unless (again) I was some combination of desperate and crazy. If I was certain the Legos would be worth $1000 one year from today and I discounted that future $1000 at 2%, I wouldn’t sell the Legos for anything less than $980.39. The fact that I’m so anxious to unload them for such a low price should tell you that I don’t really think they’ll be worth $1000 in a year.

People generally don’t lose money on purpose. They make mistakes all the time by bringing products to market that don’t work (New Coke, anyone?) or by investing in skills for which there is a very limited market. Sometimes they trade off higher incomes for other things like flexibility and job satisfaction. They don’t, however, usually make themselves worse off on purpose.

It’s a good idea to be wary of "can’t miss" investment opportunities or "hot stock tips." I fell for a couple of hot stock tips when I was in High School, and I suffered for it to the tune of a few dollars I no longer have. If someone is convinced that buying Star Wars Legos or Google stock is such a great idea, why are they either trying to sell those Legos to you or trying to convince you to buy the stock instead of borrowing money to buy more of the stock themselves?

The prices of stocks, bonds, and other assets (like Lego sets or other collectibles) "bake in" everyone’s expectations about the future performance of the asset. If people expect Legos to be worth a ton of money in a year, they’ll be worth a ton of money (with a discount for the time value of money) today. If people are convinced that Google is going to release an amazing new product in a year that will yield sustained profits for years to come, those expectations will be reflected in the price of the stock right now. It’s probably no use buying Apple because they make iPhones and iPhones are popular. That’s already reflected in the stock price. If you think everyone else is wrong and iPhones are destined to go the way of the Newton or MySpace, then you might want to act on that information. As one of my students put it about a year and a half ago, you won’t get rich trading based on what everybody already knows.

A Better Investment Strategy

For the casual investor, a portfolio of well-diversified, low-fee mutual funds is a better idea than investing a lot of time and energy in trying to beat the market.

The evidence suggests that the best investment strategy out there is "buy and hold" a diversified portfolio of stocks and bonds that is very aggressive (loaded up with stocks) when you’re young and that becomes more conservative (loaded up with bonds) as you get older. Markets are extremely efficient, which suggests that while there might be a few people out there who can provide above-market returns year after year, almost everyone who does is just lucky. For the casual investor, a portfolio of well-diversified, low-fee mutual funds is a better idea than investing a lot of time and energy in trying to beat the market.

"Avoiding foolish mistakes with your money" is a pretty sound strategy for building wealth over the long haul. One way to avoid foolish mistakes is to be extremely skeptical of anyone trying to sell you a "sure thing" like a Lego set that has been discontinued and that will absolutely (?) appreciate over time. Now can I interest you in my baseball card collection?

This article is based on conversations in my Economics 201 class at Samford University, which are in turn based on the textbook from which I teach: Cowen and Tabarrok’s Modern Principles: Macroeconomics, 2nd Edition.

Photo Credit: Brickset


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Comments
24 Comments.
Comment #1 by Anonymous posted on
Anonymous
Is this a joke?  And your supposed to be an Economics Prof.

14
Comment #4 by Anonymous posted on
Anonymous
The only joke is your grammar. I wish you people would learn the difference between "your" and "you're".

13
Comment #2 by stormdog123 posted on
stormdog123
Please no more from this author.

15
Comment #5 by Anonymous posted on
Anonymous
And no more from you.

6
Comment #3 by Anonymous posted on
Anonymous
Hah! What is the point of this article, basic or common sense, I don't get it.

13
Comment #6 by Anonymous posted on
Anonymous
I'm not surprised that you don't get it.

3
Comment #7 by Anonymous posted on
Anonymous
Worst article ever!

7
Comment #8 by Anonymous posted on
Anonymous
Worst comment ever!

3
Comment #9 by Anonymous posted on
Anonymous
To #4,5,6,8, you must be the guy who wrote the article, arrogant and very impolite. Your style of writing is bellow pay grade.

7
Comment #14 by Anonymous posted on
Anonymous
#9 Learn how to spell. You criticize others, but you can't even spell below. lol

4
Comment #10 by Anonymous posted on
Anonymous
Tough crowd!  The comments section on this one might be irredeemable at this point, but I would be interested to hear stories from others on their biggest 'foolish mistake' on a too-good-to-be-true investment or financial product.  Ken, what was that crazy CD offering from an offshore bank that everyone was getting excited about 8 years ago or so?  I seem to remember it being close to 10% or so but maybe not.  Anyway, I don't think that one turned out too well for folks.  My biggest mistakes have all been of the run-of-the-mill stock picking variety after getting excited that I knew more than the market on certain companies.  Of course, I have just enough successes there to continue to convince me that I do know more than the market at times.  :)  I guess I could also mention the thousands of dollars (and hours!) that I spent on baseball cards as a kid 25-30 years ago because they would SURELY increase in value just like the old Mantles and Ruths and Wagners did!

On a semi-related note, my favorite story on this was from my uncle on a boat purchase he made on the side of the road a number of years back.  It's a really simple story, and I'm not sure why it gets me so much, but I laugh every time.  Basically, he was at a gas station on the side of the road and saw a guy with a fishing boat on the back of a trailer that looked like about what he had been wanting, so he went up to the guy and offered him something like $5,000 on the spot for his boat. The guy immediately responded with, "Deal!". Needless to say, my uncle's description of his feeling when he heard the guy say that is classic.  As with the article's premise, it's almost never a good thing when they guy on the other end of the deal, who has more information than you do about the item/product in question, is that excited about taking your money.    

4
Comment #11 by Anonymous posted on
Anonymous
What are you smoking?

5
Comment #15 by Anonymous posted on
Anonymous
You don't like the boat story?  

2
Comment #12 by Anonymous posted on
Anonymous
Beannie babies anyone. Hobby is not an investment.

5
Comment #13 by paoli2 posted on
paoli2
A hobby can most certainly end up being an investment when you find out that those old magazines you collected just for "fun" can now be worth thousands of dollars or even miniature models of toys etc.  My partner gave away a stack of model airplanes he used to like to make because I got tired of seeing them take up space.  They turned out to be worth quite a bit now but unfortunately, not to us.  To the people he gave them to.  It was also just a "hobby". 

4
Comment #18 by Anonymous posted on
Anonymous
Hypothetical procrastination, why don't you try to sell it and find out the real value. I have a ring appraised at over $10K, but can only get $2K in the open market and my jeweler wants it for $1K on the spot sale.

2
Comment #16 by Anonymous posted on
Anonymous
I find it ironic how the warning of avoiding a "sure thing" doesn't apply the same way to stocks and bonds.  My bank CDs have outperformed my 60/40 stock/bond buy-and-hold portfolio for the past 10-15 years.

5
Comment #17 by Zimmy (anonymous) posted on
Zimmy
STOP EVERYONE, RIGHT NOW, and READ THIS!
Right at this very moment, I have a (very real) $10 Billion Dollar bill, from Zimbabwe. Just think what any of you could do with this money. But because you are nice person (and you look like my cousin), I will give you this $10 Billion Dollar bill for only US$50,000. Please wire money to my account in the Caymans.

All joking aside, I was in Zimbabwe about 15 years ago, when their currency was "real". Then of course, it got so hyper-inflated that it was worth absolutely nothing, and was withdrawn (they now use the US Dollar, SA Rand, and UK Pound instead). But you can still find new, uncirculated $10 Billion bills (and even $50 Billion bills) from various dealers and on ebay, if you want a novelty gag. I got mine for 99c but the last time I looked, the $10 billion bills are about $2.49 on ebay. Hey, wait a minute... that could be a great investment. Bought it for 99c, now they're going for $2.49! Maybe I should buy a few million more of those. Maybe even better, they'll be "re-accepted" again (as the hilariously outdated XE.com exchange website for Zim $ shows) and I will become a billionaire for real again. Or, I could just reply to that email waiting for me, from a Nigerian Prince named Jacob Investutu. Oh, the choices, the choices...

5
Comment #19 by Anonymous posted on
Anonymous
Out of billions people world wide who collect something as a hobby, 99.9999% die with it and never sell it. It becomes part of them and the attachment is so big, that some are paying insurance and buy all kinds of vaults to shield it from theft.
My point is this, if you like something and you become collector, good for you, but that sentimental value is priceless when you try to sell it, for one reason or another, it is very hard to part from it at any profit made or price offered to you and if you sell it, you will start missing it few seconds later and are tempted to stop the deal or buy it back.

2
Comment #24 by Anonymous posted on
Anonymous
Why not say, "Caveat Emptor" and be done with it.

3
Comment #25 by Anonymous posted on
Anonymous
Obviously this went over the head of many people. I thought it was a worthwhile read.

3
Comment #26 by Anonymous posted on
Anonymous
Apparently everyone saw it for what it was.  Trash.

8
Comment #27 by Anonymous posted on
Anonymous
Buy and hold burned a lot of investors. I have a good friend who, based solely on reading the daily newspaper, reallocated his 401K holdings to cash prior to the 2007/2008 crash and, as a result, he's now sitting on 2M. Yes, after the crash, he reinvested in the market. His fellow employees are beginning to break even on their losses AND they have not accounted for inflation.

When you're 25 you can throw money at the market, ride the waves and end up 40 years later looking wise and resourceful. Retire at the start of a bull market and you'll be called a maven. Begin retirement at the onset of a bear market and you'll be shocked how fast the money goes...away from your account. You cannot time the market but you sure can time yourself.

5
Comment #28 by Anonymous posted on
Anonymous
I thought the article was fine, but useless for me.  Others might have benefited.  No need to read the author's articles if you don't like them.

2