Signs of economic trouble ahead seem to be all over.
Some are underappreciated, some are over-appreciated. Both are horribly misrepresented to our detriment.
On the underappreciated side of the spectrum there are issues like inflation, one that Fed Chairman Powell and the Biden administration, along with the stock markets, seem to finally acknowledge. Yet officials and the MSM keep toeing the line and only expressing concerns privately or in passing.
Then there are the over-appreciated topics, like anecdotal stories about the woes of the clueless buyer. These could be about a car, or a house, or a bad loan agreement, but they share a common method.
Find someone who should have known better — not to blame them but we’ll get to that — interview them for five minutes, and you’ve got a story. Nevermind that someone who rushed into buying a house in San Francisco, sight unseen, fundamentally says nothing about virtually everyone else.
This is a profound disservice that obscures the real issue that underlies these kinds of stories.
Today I want to point out what ties all these kinds of anecdotal stories together. The real theme to these kinds of stories that isn’t being discussed — information asymmetry.
Recently we’ve all seen absurd stories about people in hot property markets putting in multiple bids a day on houses to try to beat the competition, sight unseen.
Basic home inspections are being denied by sellers. Even basic contract language has changed in the sellers’, more often the realtors’, favor. Obscene closing costs; no provision for repairs for what are big-ticket preexisting conditions like mold, foundation issues, and roof damage. The list goes on and on.
This is bleeding over into the rental market where people are expected to put down a several-month deposit with their application — and application fees — just to be considered. Landlords aren’t even offering tours in some cases.
Information is being obscured or outright denied to potential buyers.
Cars are all the rage for outrage articles, again bought sight unseen, with dangerous issues that used to prevent any sale until repairs were done, and are left for the new owners to handle as soon as the car is moved off the lot. Caveat emptor.
Some of the most egregious examples come from electric cars. They’re finally hitting the used car market in large numbers and potential buyers have no way of knowing the charge potential of their batteries. As a result, they’re often buying cars at premium prices that need entirely new power systems, often with five-figure repair costs.
Information that should inform cost and any evaluation of quality is willfully withheld.
Away from the big ticket items, online purchases are delayed almost indefinitely and shipping costs are being demanded as secondary payments that far exceed the quoted price.
My brother and his wife are still waiting on a sectional couch they ordered in early December, and the cost has gone up a couple hundred bucks already for shipping after the sale was completed.
What ties this all together? Information asymmetry. The short version is that people are being blindsided because there is no obligation to make sure both parties involved are on the same page.
There are some protections built into contract law, but it all depends on the contract. In other words, it all depends on what the two parties involved agree to.
These days we’re hitting an absolute extreme in favor of sellers.
But this also ties into a problem with stocks. Information asymmetry — though somewhat regulated by the SEC to at least address insider trading, although it is rarely enforced and harder to prove — is rampant. It’s gotten so bad over the last couple decades that there is a “it is what it is” mentality for what investors accept as the status quo.
It is just widely accepted yet there is no reason why this should be the case.
Unfortunately, like all our previous examples that seem more egregious because we personally interact with our homes and cars and such, we are on our own to try and minimize the difference between what they know and what we can glean from them.
Thankfully, this doesn’t need to be the case. This strikes to the heart of what we do around here.
Yes, we aim to drive strong returns from the stocks we cover. The day-to-day around here isn’t focused on that though. Instead the focus is on how we do that, specifically by driving down the information asymmetry that all of us inevitably face.
It is a frustrating, endless, and time-intensive task. One that is a full-time job, sometimes demanding even greater efforts. If it weren’t, quite frankly, we wouldn’t have been so successful in providing the coverage we do or have experienced the growth we’ve seen since we struck it out on our own.
No one I know in the newsletter business is quite as dedicated to bridging this gap as our own Jimmy Mengel.
He’s been all about the “boots on the ground” style of investing for a while, and it’s never been more important. By just about any metric, stocks are more expensive across the board than they have been in our lifetimes.
Making sure we have all the information possible means going above and beyond, and you’ll hear more about how he’s doing that for his readers in the days to come.
