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.
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
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