You’ve likely heard the phrase
“if it seems too good to be true, it probably is“.
I could spend a whole book chapter unpacking that piece of received wisdom, in fact I shall do one day soon – it is fascinating !
There is great wisdom in the phrase, and whilst its rote can be used to blindly but easily protect yourself from danger, it also removes the possibility of any success beyond … average. And fact is, the average investor today is not the highly successful one. Actually the entire phrase is frankly lazy: it’s really saying “don’t bother researching this investment, there’s chance it’s a scam or generally dangerous!”
What’s going on here ?
Our Lizard Brain (the primeval part of the human brain that exists to instantly protect us from sabre-tooth tiger attacks etc) warns our higher-conscious brain of danger and tells us to keep a safe distance. An instinct that in the case of investment analysis, is not so helpful or appropriate.
Two words to unpack from this emotionally charged statement:
- Seems. It’s a subjective word, based on someone’s particular experience somewhere. Fire can burn you so stay away from fire.
- Probably. That implies a risk assessment. Risk analysis is vital for intelligently assessing an investment opportunity, but this is a mathematical and statistic process: research, assessment, conclusion.
Objective investment research requires put aside the scepticism as well as the giddy excitement. It’s a stoic activity!
So a more helpful, but less catchy, phrase for an investor might be:
“If an investment seems to offer higher rewards than I would expect, I need to check it thoroughly before drawing a conclusion”.
Intelligent investment involves looking beyond the juicy headline figures, being neither carried away by them nor dismissing them out of hand.
In the end, investment due diligence seeks to simply get to the truth and make an informed decision. It’s harder work than “rattling off a phrase”, but ultimately far, far more helpful.
