Funds of the type run by Neil Woodford are the classic example of why investors should be required to sign a Certificate of Dumb Investment before they can invest in a fund that can buy opaque securities.

The Bank of England’s Mark Carney says these funds are “built on a lie”.  The lie he refers to is the idea the funds can offer daily liquidity when they invest in hard-to-sell securities that cannot also be sold daily.

While true, this misses the much bigger issue with liquidity.  In the financial markets, liquidity is always and everywhere a function of transparency.

And hard-to-sell securities are almost always opaque.

It is only when buyers can Trust, but Verify the valuation story told about a security that there is liquidity (daily or over any other time period) in the form of other buyers should the current owner of a security want to sell.

To remind investors the fund is buying opaque securities, investors should be required to sign the following Certificate of Dumb Investment.

I want to buy an opaque investment (or a fund that can buy opaque investments).  I understand that the person selling the opaque investment (or the fund management company) will almost certainly steal all my money.  I also understand I would almost certainly be better off buying a transparent investment (or fund limited to investing in transparent investments) where I (or the portfolio manager) can know what I own, but I want to blindly bet anyway.

By signing below, I agree that I will never, under any circumstances, complain to anyone when this blind bet inevitably goes wrong.

Investors might want to blindly bet a small portion of their money on opaque investments as lottery tickets. Investors recognize many of these bets will go bad, but hopefully the bets that pay off more than cover the losses on the bets that go bad.

However, investors shouldn’t blindly bet all their money on opaque investments.  It’s a bad idea as the investor is more likely than not to lose all their money.

This is the idea behind the Certificate of Dumb Investment.  It is a reminder investors are blindly betting and are likely to lose money.  It is a reminder investors should not put more money into this particular investment than they can afford to lose.