Only the most qualified are eligible to make this mistake
I wanted Low Risk Rules to be useful and informative, while also being irreverent and fun to read. Perhaps no financial writer encompasses this combination better than Matt Levine. Way back in February of this year he wrote about potential changes to the “accredited investor” rules (the relevant section starts about halfway down the page).
The accredited investor rules are imposed by regulators to restrict sales of certain risky, unlisted assets to more sophisticated investors. The rules operate under the assumption that the most sophisticated investors are also the most wealthy. They are presumed to be smarter and more able to understand the complexities (not to mention more able to bear losses).
In my experience, this isn’t really true. To the contrary, I find that the accredited investor rule can add fuel to the fire of the “prestige investment” problem.
In Low Risk Rules I wrote about “prestige investments” being sold to high net worth investors as luxury investment products. The prestige investment story is about offering clients something special, with limited access. Not everyone is able to invest in this, but you are because you’re special, and you deserve a special portfolio.
As I explain in the book, prestige investments are less about offering wealthy individuals an easy route to outsized returns, and more about padding the profits of the investment firm selling them.
Levine has one-upped me on calling them out. He proposed that anyone wanting to purchase any such non-public investment apply to the relevant regulatory body to obtain a “Certificate of Dumb Investment.”
To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”
In fact, Levine, a lawyer by training, was extra helpful in providing a template for what such a certificate might say:
CERTIFICATE OF DUMB INVESTMENT
I acknowledge that I am an idiot. I acknowledge that I have been swindled into making this investment by someone who is smarter than me and who wants to take my money, and I acknowledge that they will almost certainly take all of it and I will get none of it back. I hereby kiss all my money goodbye.
These are Levine’s words - not mine. There’s obviously a lot more nuance to the matter. But it’s only funny because there’s a grain of truth in there.