Why it Pays to be Skeptical
Every now and then we get questions about “secret investment opportunities” and “special deals” that individuals have heard about on the news, in books, or on email threads and our response is pretty much always “if it sounds too good to be true, then it probably is.” One of the greatest pieces of advice I have carried with me as a financial professional is to always be skeptical when looking into an investment opportunity and to remember that there’s always someone on the other side of the trade who also wants to make money. When you remember that for every buy you make someone else is choosing to sell, you are forced to question how confident you are in the trade you’re making.
When it comes to other major purchases in life such as buying a car. it’s easy to be skeptical of the salesperson. After all, it’s clear that the more he sells the more he makes regardless of whether or not he really believes in what he’s selling, and yet, somehow, we forget that there is often someone similar on the other side of all investments. Behind every fund and every “special deal” there is a salesperson whose job it is to sell that product and the more he sells the more he makes. Why then, are we not more skeptical towards those sales pitches? It would seem that the lack of skepticism people often have when it comes to investments is due to our desire for it to be true. We want to believe that there is a way for us to make guaranteed gains without risking losses. Unfortunately, just because we want it to be true, doesn’t mean that it necessarily is. The financial markets work in such a way as to make certain that they cannot be exploited for risk-free returns. Instead, the markets reward those who do their due diligence and approach all opportunities with a hint of skepticism, mindful of the fact that there is always someone else on the other side of the trade looking to make a buck. The question you have to ask yourself is, do you know something the other guy doesn’t and are you confident that things will play out the way you think they will.