Finance is not my area of expertise, nor the domain of this blog.  This post will touch on it, but the point is more to use the recent Goldman news as a case study in how little we know about the world of high finance and why tying our money up in something we know so little about is foolish.

A few weeks ago, the SEC sued Goldman Sachs for fraud.  There was an instant uproar amongst most everyone I know.  I was, frankly, shocked by the level of emotion and chose to ignore the story until I had time to figure out what happened.  Yesterday I finally found the time to figure it out, I was glad to see that Taesik Yoon of Forbes took a closer look on his blog.  Taesik’s review is quite thorough and does paint a grim picture of an at least disingenuous move by Goldman.  Essentially, they sold long positions in a security which they knew was (in part) created by a hedge fund that wanted to short it.  Goldman’s defense is that the short parties and the long parties did (and should have) conferred on the composition of the RBMS in question.  I disagree with this defense on principle, I think every security on any market should be built with the intention to succeed.  Some will fail, and people should be allowed to short, but the financial instruments should not be built to fail.

Most peoples’ reaction to the Goldman suit was visceral revulsion.  Worse, the reactions were not based on disappointment with fraud but with the fact that Goldman made money while people on “Main Street” lost it.  The fire got stoked a little more yesterday, when financial reporting showed that the traders at Goldman had an excellent record in the first quarter of 2010.  My Financial Times tells me that Goldman traders made at least $25 Million every business day last quarter and sometimes as much as 4 times that.  Most people get angry when they hear that.

I have an undergraduate focus in economics and (nearly) an MBA, so I can tell you they were just doing their jobs.  If Goldman plays their cards right on the trading desk they should NEVER lose money.  I don’t know exactly how that’s done, but I know enough to know that it’s a confusing world out there.  The critical thing here, is what I said in the first sentence, “They were just doing their jobs.”  They don’t lose money because they’re good at what they do.  You’re not good at investing in the stock market and neither am I.  These guys think about it 24/7/365, how can you and I compete with them in the market?  Why should we?

In the same way that I don’t know exactly what they do to enable them to make at least $25M everyday in a quarter where there were plenty of up days, down days and flat days; they have no idea how I can take an idea and turn it into a company.  I do though.  Consequently, if you want me to bet my life savings, I’m going to bet it on me, not on a market I know dangerously little about.  You should do the same thing, don’t be confined to the market when you make investments.  Think about what YOU can do to make your money in to more money.  It will be harder and more time consuming then the market, but there’s a much higher potential return (personally and monetarily) and much less risk (provided you’re careful and remain at least a little diversified).