Abject Failure

8 December 2003


NASD Gives Test to Investors -- 65% Fail

This is the time of year when business stories get a bit silly. With everyone focused on the holidays, there is very little serious business (save retail) to do. However, a slightly tongue-in-cheek and unscientific quiz on basic investment shows that about two-thirds American investors have no business in the market. Only 35% passed this test.

What was further disheartening for those who would privatize the US retirement system is the fact that this quiz was not given to a broad population of adults but just investors. The wider populace is probably even more unsophisticated.

The market is an amazingly powerful tool that works best under the HEMP conditions: Homogenous product, Entry costs are low, Many buyers and sellers, Perfect information is held by all. These ideal conditions are unachievable but the closer a market comes to meeting this perfection, the better it is going to work. On Wall Street, only the middle two criteria are anything close to being met, but the one thing upon which America can build is the knowledge base of its population.

For example, 79% knew what a stock was, which means 21% of American retail investors don't know. And 70% understood that a bond was a debt -- 30% did not. There is where one can start. It is necessary to get into the high schools, even the junior high schools (dare we teach capitalism to the pre-pubescent in elementary schools?) and educate the next generation. NASD's test had a 24% passing rate among those in their 20s. Clearly, it is in the long-term interest of every stockbroker in the country to either set up a program to do this, get their state legislatures to pass education bills demanding such teaching, or to sit down with kids wherever they gather in groups at talk to them about the market.

If the retail investors are really so poorly informed, they are going to be fleeced by the unscrupulous, they are going to lose their money through honest but ignorant trades, and/or they are going to have to rely on pure luck to book a profit. That is no way for the world's great laboratory of capitalism to operate. Perhaps the next time the "back-to-basics" debate arises in the school districts of America, someone will speak up about basic money management. A crash program is in order.

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