Are Stocks like iPods?
The author of recent Buttonwood column in The Economist begins by telling us that “The demand for financial assets is not like the demand for iPods.” He or she notes that the desire for products such as iPods “may be driven by fashion or a desire to enhance our status.” In contrast, “Financial assets appeal for one reason only: their ability to enhance, or conserve, the buyer’s wealth.” Yet the author contradicts this distinction between iPod and financial assets in the next sentence, “There is nothing that induces a change in attitude as seeing a friend get rich.”
In truth, financial assets are very much like iPods. Pension fund managers were swept into private equity investments by fashion as much as by the prospect of profits. Who among pension fund managers would want to wear public-equity suits when the managers of the endowments of Yale and Harvard wear private-equity suits? And wealthy individual investors are drawn into hedge funds because they let them brag about their wealth without appearing to brag. “I’m into hedge funds,” they say to fellow dinner party guests, hinting that their wealth is in the millions. In contrast, “I’m into mutual funds” says that we have managed to scrape together the $3,000 minimum investment. Desire for status ensnared Bernard Madoff’s investors as much as desire for profits.
Moreover, what are profits for? We want the joy of being envied by our friends for getting rich rather than the sorrow of envying rich friends. We want to be number one and beat the market. We want to feel pride when our investments bring gains and avoid regret when they bring losses. We want the sophistication and status of hedge funds and the virtue and warm glow of socially responsible funds. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the taxman.
Financial services companies understand well that financial assets are like iPods and advertize them accordingly. It is time for the rest of us to catch up.