Bond Review Komix Korner: “Do Your Research”

Do Your Own Research

One of my pet hates at the moment is the phrase “Do Your Own Research” (DYOR) – most commonly seen in discussions of day-trading, higher-risk “pick-your-own” P2P, and lately cryptocurrency.

How can I be against people being informed before they invest money? Clearly I’m not. The problem is that research is worthless if you don’t know what you’re looking for; all it achieves is to instill a false sense of security and one’s own insight.

I’m not a great believer in the Dunning-Kruger effect (the theory that most people significantly overestimate their intelligence), but it applies here. Otherwise we wouldn’t see so many people lose money in day-trading or other speculative investments despite having spent long hours on the computer looking at Google Finance. Either their research would allow them to avoid poor investments, or they would pull out before investing.

For a professional who does know what they’re looking for, these are the kind of things that would be considered research / due diligence into an individual security:

  • drilling down exhaustively into a company’s projections, checking that the assumptions behind them are sound, even making sure all the formulae add up correctly
  • auditing the monthly management accounts to ensure they are consistent
  • site visits to check that everything is as the company management claim it is
  • reading through a company’s contracts, with a legal expert if necessary, to ensure their contracts are watertight

These are the kind of steps that a corporate lender would require its due diligence accountants to take before they handed over a large sum of money (in the good days when banks used to lend to companies).

By contrast, here is what research typically means to a retail investor labouring under the Dunning-Kruger effect:

  • Reading the information memorandum cover-to-cover (for cryptocurrency, substitute the whitepaper for the IM)
  • Speaking to the management or their representatives on the phone
  • Reading through data which is already known to the market, or broker reports that regurgitate data already known to the market and add some guesses

All of these are essentially equivalent to staring really really hard at the back of the opponent’s cards. Without independent verification of the claims made by the potential investment opportunity, using professionals paid by you (not the people you are giving money to) if necessary, they mean almost nothing.

Most retail investors should invest using regulated mainstream diversified funds. While these still require some research, it is mostly to check that their funds are actually those three things. This is trivial compared to the research necessary to invest with any genuine confidence in an ultra-high-risk investment with a risk of total loss.

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