Perception Trumps Reality in Life and in Finance
A red streak flashes by, followed by the intimidating roar of an engine through the bustling Chicago metropolis. The car accelerates, but is soon halted by gridlock traffic. The car turns out to be a high-end Italian sports car. The driver is wearing what is presumably a Gucci or Versace suit, something Italian once more, perhaps to match the expensive car. This man is obviously a wealthy individual, or at least he appears to be.
Often times we judge people by their appearance, which could lead us to make positive or negative connotations. These assumptions, which are not always accurate, are derived from our perception. If we perceive the man to be rich, then he must be rich, right? No. In the field of business particularly, one may encounter several people like Mr. Ferrari himself, who are not rich and may even have a negative net worth. The man who was actually wealthy may have been sitting at the McDonald’s across the street when the Ferrari passed by. It basically comes to the “Millionaire Next Door” persona, in that many millionaires dress in regular clothes and drive used cars. Because let’s face it, a person doesn’t get rich spending money, they get rich saving it religiously.
In personal and corporate finance, it is important to follow reality and not misguided perception. Many financial scandals and crises went undetected and were not prevented because reality was skewed by perception. Take a look at the recent stock market crash. A few years ago, everything was doing well, the Dow Jones Industrial Average was rumored to hit 14,000 points and new homes were being built at lightning speed. In fact, they were actually being built too quickly, and we all know from economics class that when supply increases, price decreases. What appeared to be a good thing was really creating a bubble in real estate, and when that bubble popped, the short selling began and as well all know, the market did a free fall.
Many people did not see the collapse in the market drawing near. Some analysts and economists claim they detected the housing bubble when it began. However, it is often difficult to interpret reality in some corporations that have immoral managers and operate unethically. Enron is probably the most famous example of unethical business management. They manipulated their financial statements through the inappropriate use of depreciation. Basically, they wrote off minimal items, such as toilet paper, to make their bottom line look better.
Be careful when investing in a business, to examine the financial statements before taking up a position. Although many people suffered great losses with Enron, much more scrutiny has been taken with financial statements, much to the dismay of many accountants, to make certain a company’s bottom line is truly their bottom line. Also take note of where the market is. Is it close to the one-year high or the five-year low? Don’t simply follow popular opinion or perception or the latest hot-stock tip. Spend some time looking at the market statistics and economic indicators. Let reality trump perception for a change, and don’t let perception guide your judgment on stocks or people and I promise you’ll be a better investor and an even better person.