Hedging My Bets

Two days ago I blogged about the proposed changes to the hedge fund industry. I wrote that I felt the SEC was overstepping its bounds with the proposed rule. Some might have wondered how this relates back to this random walk that we are on.

In the beginning of Malkiel's "A Random Walk Down Wall Street" which will henceforth be called "The Book", he gives a brief history of bubbles. One particular bubble, that of the growth stocks of the 1960's, was marked by incredibly high valuation of new issues. Many of these stocks had no current earnings but still saw a run up in their share price post-issue (does this remind anyone of the late 90's?). Some may question what exactly the SEC was doing then to protect investors? Well they were doing all they could! These IPO's were sold by prospectus, many of which -- due to SEC regulation -- contained in big bold type:

WARNING: THIS COMPANY HAS NO ASSETS OR EARNINGS AND WILL BE UNABLE TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. THE SHARES ARE HIGHLY RISKY.

Malkiel goes on to write:

"But just as the warnings on packs of cigarettes do not prevent many people from smoking, so the warning that this investment may be dangerous to your wealth cannot block a speculator from forking over his money if he is hell-bent on doing so. The SEC can warn a fool but it cannot prevent him from parting with his money."

I couldn't have said it better myself! Speculators will always find a way to lose money in poor investments, but their actions shouldn't lead the SEC to curtail the investment options of the rest of the responsible investing public.