State of Confusion

Posted by Ken Norquay

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Kingston, Jamaica, is in a state of emergency: the police are attempting to arrest an alleged leader of a drug and guns cartel. There have been gun battles off and on for a week. But here seems to be some confusion about who are the good guys and who are the bad guys. Some Jamaican immigrants claim that the Jamaican police are corrupt, sometimes using their power to extort money from ordinary citizens. And that most accept bribes from organized crime. The press is hinting that some Jamaicans portray this alleged gang leader as a modern-day Robin Hood, selling drugs and guns to rich Americans and giving some of the money to poor people who live in his home neighbourhood.

In Canada, we automatically assume the police are the good guys and the alleged gang leaders are the bad guys. We assume the establishment has integrity. No so in Jamaica. They live in a different world.

Spectrum of Trust
We Canadians trust our institutions implicitly: we believe what the authorities tell us. Jamaicans implicitly distrust authority figures. If there were some way to measure the trust inherent in a society, Canadians would rank very high. We just trust people; it’s our nature. And Jamaicans would be at the other end of the spectrum. Their society doesn’t trust anyone; it’s their nature.

In my book, Beyond the Bull, I discuss how our human nature helps us or hinders us in the investment world. Which is more useful: trusting the system or distrusting the system? Acting ‘Canadian’ or acting ‘Jamaican’?

Let’s look more closely at Canadians’ propensity to trust the system. The danger is that we trust too much. Too much trust becomes naiveté. The famous 19th-century American showman P.T. Barnum had a saying about those who trust too much: “There’s a sucker born every minute.” Are we suckers in the investment world if we trust too much in the establishment?

Do we trust our government too much? When they bail out the banks and auto makers with our money, will it work? When they introduce a new tax, will that work?

Do we trust economists and bankers too much? When they tell us it’s safe to borrow money and buy a bigger house or a new car, should we believe them? When they tell us mortgage interest rates will go up, is it true?

Do we trust our investment advisors too much? When they tell us it’s safe to invest in the stock market, is it really safe? When they tell us stocks are better investments than bonds, is that accurate?

Too Much of a Good Thing
Regular readers will know this writer’s view: every Canadian investor needs a little Jamaican spark in them. We would all benefit from a little disbelief in the system. The American system broke down in 2008/09 when the biggest blue-chip bank, insurance company, mortgage company, stock broker, and car manufacturer in the U.S.A. had to be rescued by the government. This year, the European common market is breaking down because they trusted the Greeks, the Spaniards, the Portuguese, the Irish, and the Italians too much. One reason the world’s economies are breaking down is that we all trusted too much. The hallmark of 21st-century investing is naiveté. Naïve investors ― from the most sophisticated banks and institutions right down to ordinary individuals trying to save for their retirement ― all trusted too much.

The Cure
What’s the cure for naiveté? Should we all take a lesson from down-trodden Jamaicans who are trying to protect their modern-day Robin Hood? Or are those poor souls just as naïve as yesterday’s bankrupt bankers?

The ‘cure’ for naiveté is responsibility. Trust yourself. Take responsibility for yourself. Keep yourself in a state of alertness about what can go wrong in your world and react to it. The cure for naïve Canadian investors and unbelieving Jamaicans is the same: “To thine own self be true.”

In a few weeks or months, peace will return to the poor side of Kingston, Jamaica. The police will still be the police and the drug business will still be the drug business. And the poor will still be poor.

Over the next few weeks or months (or years), the financial markets will do whatever they do. But for millions of investors, things could be quite different. If the stock market goes down the way it did in 2008, their retirement could be less comfortable than they had expected. The key for Canadian and American investors is to preserve capital in risky times. Poor Jamaicans have little hope of escaping poverty. But Canadian and American investors do have a hope of holding on to their lifestyles. To do so, we must take responsibility, figure out who are the good guys and who are the bad guys, and protect what we have.

In economic terms, we live in high-risk times. Dinosaur capitalism is dying. Don’t trust big government or big business: those who used to be good guys are no longer so good. Sell your higher-risk investments and keep your capital safe. To thine own self be true.

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Old Approach ― The Salesman’s Model:
There are customers with financial needs, investment firms that offer financial products to meet those needs, and licensed salesmen to sell those financial products. It’s all about persuading people to buy something.

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