The Average Investor is Stupid
From Zanecorpwiki
There's a certain dysfunction in the mainstream investment culture. On the one hand non-accredited are generally barred from the most profitable investments based on the idea that the average person needs protection from himself. After the wanton fraud of the 1920s this seemed reasonable.
At the same time, it's the so-called "sophisticated investors"[notes 1] are the ones that caused the crash of the 30s (and the more recent financial crisis as well). And while the average schmo is essentially barred from investing in his neighbor's pool cleaning business on the theory that he doesn't know any better, he's free plow his life savings into a publicly traded company heavily leveraged into sub-prime mortgages and exotic instruments that no one--not even the company--understands.
On the one hand, limiting the ability of any old huckster to scam Grandma's out of their life savings is certainly a good thing. But a law that forbids people from putting money into the small, local businesses that they understand best and requires them to invest in large enterprise which they understand least is silly.
The original idea behind all this was based around SEC fillings. The problem, it was thought, was that the hucksters were scamming people by making promises but providing no real information. The solution, then, was to create a the SEC where companies would be required to make public disclosures regarding their finances. If a company did that, then the company could sell securities to anyone.
To be fair, this more or less half worked. It may have kept the average American from being able to invest in small businesses, but it kept the big companies honest and in truth did much to mature the business culture.
However--as is often the case--this new age of supposed security has come at a high cost. The first problem is that it becomes so ingrained in our way of thinking that we don't even think of the alternatives. For over 80 years we've essentially barred investment in small business and artificially diverted everything to large enterprise. So total is this artificial reality that there's no one alive that knows anything different.
Yet, we know that small business reacts faster, has greater growth potential, hires more people, and is the source of nearly all innovation. I'm not proposing that we kick the pendulum the other way; big business is very useful too. We need big business to stabilize the economy and handle the truly capital intensive projects.
What we need is both. A balance between the creative dynamism and local knowledge of the small business and the staid predictability and conservatism of big business. Push it too far in one direction and you have chaos. Too far in the other: stagnation.
Clearly, we are not entirely at one extreme, but I would argue that what creativity and dynamism we have in the economy at the moment exists in spite of the rules that stifle small business investment.
Notes
- ↑ Sophisticated investor is a term of art which relies almost entirely on a wealth test.
