Making investment too safe is risky

Her investments were handled by her son but she took an intelligent interest in them.

When the annual report of a company arrived she read it then rang her son and told him to sell all the shares she had in it.

Her reason?

The chair wasn’t wearing a tie in the board photo.

The sartorial standards of a board chair may not be very solid ground on which to base investment decisions but in this case the investor’s action was right. Soon after her shares were sold the company went under taking a lot of other people’s money with it.

There are some very sad stories of people who put their faith, and their money, in companies whose rhetoric outperformed returns and who lost the lot and – in the cases of those who’d borrowed to invest – more.

This has resulted in calls for tighter regulations for financial advisors and directors.

Some of the actions of some of the people involved in companies built on very shaky foundation warrant this but making investment too safe is risky.

As Stephen Franks opines:

The deterrent of the prosecutions could see the birth of  impeccable candour among company directors, ushering in a new age in which fear of prosecution makes it  possible to take at face value nearly all public commercial discourse, assuming statements have been checked to exhaustion for possibly misleading inferences. The resulting public confidence will see a flood of renewed saving and direct  investment by the newly trusting “mums and dads”.

Or we could be watching a dramatic acceleration of the great decline in  opportunities for direct public investment, as promoters directors and major shareholders decide that the compliance costs (and risks) of public offering far outweigh any lowered costs of capital.

And in another post:

Our new law must target crooks, people with criminal mens rea (guilty minds). It must not treat foolishness and over-optimism and carelessness as if they are similar species of wickedness. Because law that conflates them all will scare honest people into doing nothing, or spending time on fruitless compliance back-covering.

If regulations go too far they will place unrealistic responsibilities on directors and make it difficult to find them willing to do much or serve on boards  at all.

Protecting investors from bad directors is a worthy goal, but the law which aims to protect might also stifle innovation and growth which require varying elements of risk.

Investors and the wider economy will gain nothing and lose a lot if that happens.