I run a free graphite metals investment e-course and one of the questions I get asked pretty regularly from subscribers and non-subscribers alike is: “Which stock is a good one to invest in?”
This question scares me!
Sure, the question is asked with the very best intentions. People want to find good stocks to invest in and they look to people who might know a bit more than they do to help guide them. Fair enough; I get that.
But best intentions aside, this is a scary question and I’m always alarmed when I’m asked for this advice. Here’s why:
A GOOD INVESTMENT FOR ONE PERSON IS NOT A GOOD INVESTMENT FOR ANOTHER
The people who ask me this question are not people I know really well. They are people who have connected with me online — usually via email, and usually because of my connection to the graphite e-course. How can I possibly know what is a good investment for them? I’m a very risk-tolerant investor so I don’t mind investing in stocks that are far more speculative than others. And our timelines might be different — on some stocks I’m willing to watch in the short-term while with other stocks I’m fully expecting to hold for months or even years.
To give you an example: I bought a speculative junior resource stock that I liked. The stock was cheap but I’m confident about the trajectory of the company and expect to hold the stock while they go through the complicated and time-consuming permitting process. But a friend asked me what I was investing in, I told him, and he bought this stock too. Unfortunately, it has dipped a bit in the recent resource market dip and he’s getting panicky. He complains about the investment and I expect he’ll be selling it shortly at a loss.
So if that’s the case for my friend, it is certainly going to be an even greater issue for people I don’t know!
THE MARKET CHANGES
The other reason that I’m scared by the question “what’s a good investment?” is that the market changes. Investments come and go. There was a time when Research In Motion seemed like a good investment. There was a time when Berkshire Hathaway didn’t seem like a good investment. Apple seems like a magical do-no-wrong investment right now but that won’t last forever (sorry to burst your bubble).
I remember working at an investment tele-center helping self-directed investors buy their stocks. One guy was stockpiling gold like crazy. I was fascinated because no one else was doing it. Everyone else at the tele-center laughed at the guy. This was in 2000, when gold was about $275/ounce. Today, it’s over $1600/ounce.
THE DEFINITION OF “GOOD” IS A FLEXIBLE DEFINITION
When someone is looking for a good investment, there is something very interesting going on. They are looking for a stock that is going to go up in price. And they don’t mind buying it if they are confident that the price is going to go up. However, most average investors look at past performance to determine whether or not a stock is going to go up in price. Therefore, if a stock has been going down in price and it’s super-cheap, they might be reluctant to buy it because “what if it keeps going down?”
However, as Warren Buffett explains over and over, a cheap stock is exactly the stock that you want to buy. You should buy stocks when they are beat up. But very few people do this. Most people aren’t really looking for a “good” investment. They’re looking for an investment that has recently risen.
So I’m scared when people ask me to recommend a “good” stock. I never recommend anything (not only because I’m prohibited by law but also because my definition of “good” and their definition of “good” are not going to be the same).