Recently I met a man who had an equally interesting and scary story. In short he got lucky once on the share market and is now trying to get lucky again – only this time he thinks he understands what he is doing because he got lucky the first time. But now the stakes are higher, he has recently sold his family home and has bet most of it on a silver mining exploration company. Because that’s how he got lucky last time.
How he got lucky the first time – ‘I had this friend’
He told me, ‘I had this friend. Well… he was a friend of a friend. I met him on a surf trip with another mate.’ Turned out this this friend was a stock broker. I have no issues with stock brokers they are just doing their job and I personally have a friend that is a solid investor and stock broker – but my friend would also be the first to tell you that providing good investments is not the objective, making as many and as big a trades as possible is. Many brokers (just like real estate agents) get paid a commission on each trade so of course that will be the priority. Please note: This is not a slam on the whole broking industry, each individual should be judged as such.
The next part of this story will have you shaking your head and thinking I would never do that, but so many do – human emotions can make us do some funny things at times.
This new found ‘friend’ of his had been doing a few trades for him and then one day rang and said – I have just placed a trade for $50,000 for you in the IPO (Initial Public Offering) of Company X, it’s going to go through the roof, you have 5 days to transfer the cash. This guy told ‘his friend,’ I haven’t got $50,000! His friend replied, ‘Well you better get it.’
The poor guy scrambled all he had together and then had to borrow the rest off of his in-laws. Then, he didn’t hear from and couldn’t get a hold of ‘his friend’ for the next 4 years. He didn’t even know the name of the company the $50,000 had been invested in.
Eventually through a friend, of a friend, of that friend he got a hold of him – he was living in Bali. No, he hadn’t run off with his cash, but he didn’t really care either. He just said on the phone, ‘Oh, do you still have that investment? Try ringing this company that I used to work for, they may have the details for you.’ and that was it, he hung up.
Turns out that his friends hot tip in this IPO was right (got lucky I suspect) and his $25,000 investment and that of his in-laws had turned into over $800,000 each and they didn’t even know it all that time. Note: If this part of the story has just increased your heart rate and got you excited, this is the emotion I am warning to be cautious about – we are all susceptible to it.
The point of this above story is, see how little he knew and had to do with this investment. How could he possibly believe he had anything to do with this outcome and how does he believe he can do it again now?
How winning and wanting can ultimately make you lose
Being an investor I tend to meet a lot of people with similar stories to this and it always worries me whilst listening to them. If a person asks my opinion I will tell them, but more often than not they are so focused on what they want to happen, even when you tell them your opinion and explain to them why what they are doing is gambling, they simply do not hear you. Sad thing is it is gambles like this that can tear families apart.
This guy didn’t hear my explanation of how the markets really work and appears to be blinded by reality because:
- He got lucky once with a silver company and now believes he can do it again.
- He hates his job and is trying desperately to find a way out.
- He is currently living with his in-laws, feels pressured to move out and because the Sydney property market is currently booming he is trying to ‘catch up’ with it so he can buy back in.
These three inner psychological drivers are a perfect storm for making poor investment decisions. I always remind myself to avoid making any investment decision driven by emotion rather than analysis.
He could actually get lucky again
But I doubt it. I briefly looked into the company he has invested the majority of the proceeds from the sale of his family home in and, ‘wow’ its a big roll of the dice. The company has next to no cash, has been raising additional capital from investors without any exploration success for the past ten years and in a recent announcement mentioned that after their latest capital raising they are going to review their business strategy. No margin of safety, no track record and no clear objective – scary, scary, scary.
But, you know what – crazy things happen from time to time. They could just stumble upon a massive ore deposit and then just stumble upon a company that is cash up and willing to partner with them to fund the development of it. Or they could just spend all their remaining funds on lotto tickets and they may get lucky that way – I am being cynical now, but I do not see this comparison as being too far from the truth.
So, please be careful. Try not to get greedy, desperate or conned by a good sales person. Do not follow anyone blindly and always do your own research – even if that somebody is me! I provide my research, watchlists and portfolios to subscribers to do with what they will, as I believe there is great value in learning from the experience of others and from my observations of the industry I have seen too many ‘advisors and brokers and managers’ that are quick to invest your money, but slow to show what they are doing with their own. Either way, any decisions you make with your own hard earned cash and savings should be your own. They should be clear and justifiable decisions made without any pressure from anybody else and without any psychological in-balances at play – greed, envy, sloth or other.
I hope this story serves as a solid cautionary tale and I truly hope the main character of this story gets out without losing his shirt.
Enjoy the ride!