Great-Grandfather

“Never eat anything your great-grandmother wouldn’t recognize as food,” Michael Pollan famously advised in The Omnivore’s Dilemma. Referring to the complex, mass produced, foodstuffs (as distinguished from real food) found on supermarket shelves, he makes the case that our great-grandmothers wouldn’t know whether the white stuff in a tube called Go-Gurt, (containing high fructose corn syrup, modified corn starch, and kosher gelati and other arcane ingredients) is to rub on your body or add to your laundry.

Pollan’s words came to mind as I read Gretchen Morgenson’s column on credit default swaps (Arcane Market Is Next to Face Big Credit Test, NYT, 2/17). In questioning the stability of these swaps, Morgenson reminds us that, “…financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulators’ ability to monitor the market for safety and soundness.”

The same day, Geraldine Fabrikant quoted Yale’s very successful, very sophisticated investment manager, David Swensen, who says in his new book (Unconventional Success: A Fundamental Approach to Personal Investment), “Don’t try anything fancy; stick to a simple diversified portfolio...the only people who should get involved [in arcane investment strategies] are sophisticated individuals who have significant resources and a highly qualified staff…”

But that’s just Morgenson’s point. It is these very ‘sophisticated’ investment jockeys who have constructed ever more complex strategies separating the investment from the investor. And when it comes to default credit swaps she points out, “as investors who have purchased such swaps try to cash them in, they may have trouble tracking down who is to pay their claims.”

Young people have shown a lively curiosity to know more about investing in the last few years. Fund managers are, to these kids, the new cowboys—taking big risks for big rewards. (Who wants a summer job if you can buy stock and make money while hanging out at the beach?)

No doubt sophisticated managers with extraordinary mathematical minds and the resources to do serious research are in a position to benefit from complicated financial plays. But adults mentoring the next generation, may be wise to start counseling their young away from investments that ‘your great-grandfather wouldn’t recognize as sound business practice.’ We watch Jimmy Stewart in ‘It’s A Wonderful Life’ each Christmas, in part because the very notion of a direct relationship between the banker and the person banking seems so quaint. But if you can’t figure out who owes you when it’s time to cash in, that quaint notion of a direct relationship between investment and investor begins to look a lot less quaint and a lot more sensible.

Complicated investment schemes--and legitimate strategies-- have been around since long before our great-grandfather's time, but computing capacity and the global marketplace offer a disconnect that that would have been inconceivable at one time. Giving kids tools to audit the auditor means helping them understand the basics of investing and making money. Helping them understand what it means to have a direct connection with your investment is not a bad place to begin.