If you have read this blog for longer than a week you are already familiar with my colleague Ben Carlson’s work at A Wealth of Common Sense. Ben’s day job is as Director of Institutional Asset Management at Ritholtz Wealth Management. He also just published his third book Don’t Fall For It: A Short History of Financial Scams. (You can find links to all of Ben’s books here.)
In support of the book Ben recently made a trip to New York City to do some media appearances including on CNBC and Yahoo Finance. He also did a Q&A with Jane Wollman Rusoff at ThinkAdvisor. Fortune also published a choice excerpt from the book. Acorns also published three rules on how to avoid financial scams culled from the book.
I had to the pleasure to ask Ben some questions about his new book. Below you can find my questions in bold. Ben’s (unedited) answers follow. Enjoy!
AR: It’s been a good decade since our last widespread, i.e. housing, bubble. Is that long enough for people to have forgotten their previous pain and suffering and embrace a new bubble?
BC: William Bernstein wrote the following in his excellent book The Four Pillars of Investing which was published in 2002:
The Great Internet Bubble will not be the last of its kind, but if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of its senses, sometime around the year 2030. If the current generation gets caught out again, we should be very disappointed, as no previous generation has been so dense as to have been fooled twice. But then again, the Boomers have shown a singular talent for gullibility, and there is still plenty of time.
Of course, there was another bubble that began just a few short years later as everyone went crazy for real estate. It doesn’t feel like there’s much euphoria at the moment, but never say never.
AR: You show in the book that high intelligence is not a defense against scams, think Isaac Newton. If intelligence isn’t a defense, what is?
BC: Self-awareness, humility and the ability to understand your own weaknesses will take you further in the markets than raw intelligence. Temperament matters more than IQ when it comes to money decisions.
AR: I love your Type I and Type II Charlatan taxonomy. The immediate example that came to mind was Adam Neumann of WeWork infamy. Where do you see him in this framework?
BC: Neumann is a perfect example of a Type I charlatan. He was the visionary who came off as sincere in wanting to change the world yet he certainly took his own ideas way too far without thinking through the ramifications. He created billions of dollars in value through the combination of a good idea, plenty of VC funding, and the ability to tell a good story. But he also believed way too much of his own bullshit and that’s the reason he’s also destroyed billions of dollars in value (most of which is not his).
AR: In the book you talk about ‘only having to get rich once.’ What is it about the rich and famous that makes them uniquely vulnerable to cons?
BC: The obvious reason the rich and famous are vulnerable to cons is because they have more money and something of a target on their back. And even among the wealthy class there exists a keeping up with the Jones’s mentality. We are status-seeking creatures and no matter how much money we have, a little bit more will always be enticing.
AR: “There is a sacred relationship between risk and return.” Almost all the scams in the book violate this rule. How are we to know when the returns outweigh the potential risks in an investment?
BC: The simple answer is to have a basic understanding of the range of potential outcomes in the various financial asset classes. But you also need to be aware of the ancillary risks that can come about from investments that fall outside of the typical investments. Every single investment on the planet comes with some form of risk. It really comes down to knowing what you own and why you own it.
AR: In the book you note six rules to avoid cons. One of which I think is way underrated has to do with the custody of their funds. What do we need to know about who is holding your funds?
BC: Even when you outsource the management of your money to an advisor or investment manager, the funds should still be held at a third party custodian (basically a bank or fund company) in your name. The statements and pricing should come from the custodian to avoid falsified documents. And you should be required to sign off on any transfers out of the account before the movement of funds.
AR: Did you change anything about your own approach to investing (or finance) after having written the book?
The more I learn about decision-making and human nature the more unsure I become about my own abilities as an investor. Many of the faulty decisions chronicled in my book deal with situations where people are far too trusting of others. But there are also times when we’re far too trusting of our own gut instincts.Are there times when it makes sense to trust your gut? Of course. But making decisions about your life savings should not be one of these instances. Researching this book cemented for me the importance of making good decisions ahead of time by having rules and filters in place when it comes to big money decisions.
AR: Thanks Ben for the time. Good luck with the book!
*Full disclosure: Ben was kind enough to send me a review copy of his book.