Investors won’t read the fine print November 5, 2012 at 7:24 am

An interesting observation from Steven Davidoff, who has been reviewing what was actually in the Abacus documentation:

Sophisticated investors are supposed to read the documents. We all know that retail investors don’t often take the time to read disclosure, but the securities laws are based on the idea that information is filtered into the markets through disclosure to sophisticated investors who then set the real price of the security.

This is a form of the efficient market hypothesis. If sophisticated investors can’t be bothered to read the documents and act on them, then we have a real gap in the entire disclosure regime and asset pricing generally.

I do think there is ample evidence that ‘sophisticated’ (at least in terms of the amount of money they have and the time they have been investing) did not read the docs of the deals they entered into. But that isn’t a flaw, that is a feature. Caveat emptor — they didn’t, and they lost money. That, surely, is the way it is meant to be.

2 Responses to “Investors won’t read the fine print”

  1. When I was a bond manager, I read every structured bond prospectus, the data, etc. Anything that was not vanilla I read. You could find some odd angles that others weren’t considering — occasionally it made us money. More often, it kept us from losing money by avoiding relying on the Street’s modeling.

  2. [...] in positions of responsibility who don’t read the fine print are supposed to lose [...]