Last week I talked about Ponzis and Pyramids and was planning to move on to something else. But I happened to catch a financial advisor on the radio as I was driving around town last Saturday. It was pretty much just an infomercial designed to get people to attend his seminars (no phone calls were taken) Not much useful information was given but lots of criticism of mainstream financial advice and advisors.
As
this man tried to convince his audience of his superior knowledge he shared a
story about meeting with three finance professors at a major university. These
three professors (according to the man on the radio) told him that in their
upper-division finance courses they would advise their students to use 15-year
mortgages on their homes. He then went on to say that these finance professors
were AMAZED when he showed them how
much better off they could be if they took the difference in payments between a
30-year mortgage and a 15-year mortgage and invested that difference in a stock
fund. He went on to say that those professors had never seen anything like that
before.
SAY
WHAT! I almost drove off the road. This cannot, and I mean CAN NOT,
possibly be true. Leverage is one of the most basic concepts in finance. I have
written about it twice in this blog’s first two months (April 30th
and May 28th) His claim would be equally incredible had he told us that he wowed three mathematicians with the quadratic formula.
How
can I be so sure?
First,
I have taken virtually every finance course that exists at both the masters and
doctoral level and there is no doubt that anybody with a doctorate in
finance has a firm understanding of the basic principles. I have also taught in
all three areas of finance (corporate finance, financial markets and
institutions, and investments) and I am very familiar with the undergraduate
finance curriculum and it is extremely unlikely that any remedial rules of
thumb regarding mortgages would ever come up in an upper division finance class.
In fact, hardly any applications involving personal finance are covered in the
finance major. The curriculum focusses on corporate finance and business
problem solving. Yes, a personal finance class would cover these topics (and I
certainly address them in the personal finance class I teach) but this is a lower
division class designed for non-majors.
Most
people listening to the radio last Saturday probably believed this man’s claim
that he schooled THREE (not one, not two, BUT THREE) finance professors (he
also claimed to have trained over 3,000 financial advisors but only 200 could
pass his final exam! Does anybody see a turnip truck?).
So
where does this leave those listening on the radio? VULNERABLE! The whole point
of his story was to put a chink in the armor of those who we traditionally look
to as experts and to elevate those who are peddling less than stellar (and typically
very expensive) concoctions. Yes, he has them right where he wants them.
Moral
of the story: Watch your wallet!
Of
course, there is plenty that we do and do not know (for real) in the field of
finance. For those interested in what these are relative to investing, the
following article is required reading:
http://www.nytimes.com/2013/05/19/business/for-stock-picking-advice-dont-ask-an-economist.html?_r=1&
MM
