Bright Lights Project: Stock Markets

I was wrong. The gap is factual, not perceptual. There’s no good way for marketing to explain it, at least not convincingly, and certainly not in any way that would inspire more investment. This is why I think we’re seeing nothing but the same old pablum on TV and the web. There are three pretty generic messages from which most firms choose:

• Balanced portfolios — The key to riding the sporadic ups and downs that are inherent in markets has always been to allocate money across multiple markets, many of which move either in counterpoint to one another, or somewhat independently. This message is often combined with a pitch for Patience, in that the other salve to market turmoil is simply to wait it out.

• Expert help — A number of firms are now actively marketing the availability of their expertise, not just in terms of access to information but actual people who will help advise investors on what to do. No advertising reveals what these experts actually know, but the promise is that they know something that matters.

• Individual empowerment — This is perhaps the most powerful and thus recurring message about stock investing, since it plays to peoples’ desire to control their own lives. The unspoken premise is that individual investors have the slightest chance in Hell to understand, anticipate, and accurately react to individual stock or overall market movements.

Of course, these messages are not only outdated but irrelevant if not mostly wrong.

Stock investing is not a force of nature. Few generations have ever even contemplated it, and when they did it was more like gambling than anything else. Joint stock companies were anointed by kings and queens to fund high risk/high return endeavors, like discovering gold or growing tobacco in the New World, and only aristocrats and the wealthy could participate. We common folk got into the occasional deal when they were too “big” to keep us out — think tulip bulbs — and our capacity for throwing good money after bad helped inspire Charles Mackay to write Extraordinary Popular Delusions and the Madness of Crowds in 1841 (he felt crowds tended to reduce their collective I.Q to something close to zero).

Americans were skeptical of investing in stocks through most of our history, both due to the expense and risk of doing so…and when we did, we suffered the same fate as our deluded ancestors (can anybody say “Crash of 1929?”). The vast majority of households had nothing to do with stocks until the latter half of the last century, when innovations like mutual funds, 401(k) programs, and a dissatisfaction with the effects of inflation changed they way stock markets were perceived. Now, a slew of Boomers have their life savings stuck in stocks, and many twentysomethings+ believe that making money from stock investing is like putting a can out in the rain and collecting water. The disconnects are shocking, yet financial services firms tolerate them, if not encourage them.

Ultimately, it turns out consumer skepticism was warranted, and my gut tells me that they’re figuring that out. Nobody has to invest in stocks, and there are qualities about today’s markets that defy explanation or, better put, defy translation into a cogent argument for why any individual should risk a penny doing so. So why couldn’t retail financial services firms try to change the game by changing their actions, not just their communications, with ideas like:

• Explain how the world has changed — I’m not sure I understand it with any accuracy, but the influences on stock prices and market movement are different, faster, and perhaps more unpredictable now than they were a decade ago? The retail brokerage business itself changed (the Merrill Lynch debacle being a prime example), yet nobody has explained what it means, or how the surviving firms now operate differently. Couldn’t these points — these big, hairy, all-encompassing points  — form the basis of a broad branding strategy from an enlightened financial firm (vs. being buried on some web page waiting to be discovered by a select few)?

• Change the products they offer — Mutual funds are institutionalized tools to spread risk, gaining investors more exposure for less money, but they were developed for markets a half-century ago. Maybe the idea is a bit long in the tooth? Could there be other ways to address, package, and/or price stocks for individual consumption? ETFs are an example, though really a variation on the theme. Are there new ways to incorporate technology? The pricing model is also old and perhaps outdated: retail brokers make money on sales charges or fees on accounts. Why not figure out how to make stock investing a subscription or something? Maybe incentivize individual investors with some profit-sharing scheme in which brokers and customers make (or lose) money together?

• Come up with a better promise — This is a tough one, but I can’t help but think that the long-term “wait and hope” argument for price appreciation just doesn’t cut it any longer. We read all the time about rich people who make millions in a matter of nanoseconds, and we watch markets lose many percentage points of value in any given day. And the best brokers can do is tell is to be patient? How about a different model (or models) for investing, so those in-house experts could help investors try to make money in a shorter timeframe? I have no idea how they’d do this, but it’s at the core of the disconnect between expectations and outcomes.

Naw. We won’t see any of this. The ground is shifting but most financial services firms are too wedded to old ways of doing business. And there’s truly a sucker born every minute, so the blowback from disgruntled investors will grow, but it’ll grow slowly. There’s still lots of money to be made the old fashioned way…promising things people don’t really need, avoiding telling them what could actually help, and then walking away with profits before the gig falls apart completely.

What do you think?

(Image credit: What, me worry?)

Original Post: http://www.dimbulb.net/my_weblog/2011/09/bright-lights-project-stock-markets.html