The Unintended Consequence
If you’re not from the South, that strange vine that seems to permeate every vacant space is called Kudzu (http://en.wikipedia.org/wiki/Kudzu). Native to southern Japan and southeast China, it was introduced into the US in 1876 to combat soil erosion. If you drive across any southern state, the impact of Kudzu is painfully clear.
When it arrived in the US, it was thought to be an instant cure for soil erosion plaguing farmers. It grows a foot a day, has a deep root system, and improves the nitrogen content in soil. In the short-term it’s a win-win. The problem of Kudzu did not develop overnight so its short-term benefits allowed it to spread like wildfire.
Not until many years later did the unintended consequences of Kudzu become painfully clear. Anything that grows a foot a day must always remain your friend or you got problems. Kudzu has no natural predators, it’s hard to kill and as a bonus it kills everything in its path. Life without Kudzu in the South is now just a dream.
Kudzu seems to be a strange metaphor for wealth preservation but the story is critical as you prepare yourself to battle the financial factory. The factory makes a living selling its products based on short-term benefits. And like Kudzu, they use these benefits to spread their products rapidly before the unintended consequences are revealed.
If you remember Structured Notes, Auction Rate Securities, Hedge funds, and Indexed annuities, you have witnessed the investment equivalent of Kudzu. And only after it has permeated everything, do the side-effects become clear. And like Kudzu, once they show up in your portfolio, they don’t go away easily if you can get rid of them at all.