Archive - Finance:

The posts in this category are about finance: The economy, the stock market (including trading, investing, and commentary), cash flow, tips for financial professionals, and more. Read what I’m thinking on topics like money, financial management, and the capital markets.

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Which is better — a sure thing or a gamble?

By Aaron Hoos on May 14, 2013 in Business, Finance, Real Estate

My friend is facing an interesting dilemma and I’ve been thinking about it for a while. I finally decided to write it out as a blog post just to get it out of my brain and because I sometimes do a bit of my best thinking while writing. I guess that’s a bit of a warning that there may not be a cathartic conclusion at the end of this post. If you have any thoughts, I’d love to hear them. Just add them in the comments.

Here’s the situation: My friend is selling his house because he’s moving to another city for a new job. The housing market in Winnipeg is strong and his house looks good (particularly after some renovations) so we know his house will sell.

Here’s the dilemma: He was going to list his house on the market but he was recently offered a price for his house from a buyer prior to listing. Should he take the sure thing or should he gamble on the market?

The “sure thing” price is pretty fair and about what his asking price was going to be. It’s about in line with what other similar houses are listing for. But the gamble is also an option because the housing market in Winnipeg is a little weird right now and it’s not out of the question to have someone bid higher than the asking price. (Note: I’m not going to reveal the prices here on my blog to protect his privacy but also because I realized that the price itself doesn’t really matter. The same ideas would hold true for other price points as well).

So when he posed this dilemma to a group of friends at a pub a couple of weeks ago and the table was divided. We were each adamant that we were correct and the other person was making a mistake. I said he needed to take the “sure thing” price and others said he needed to gamble and put his house on the market because his house might sell for more.

So here’s why I said he should take the sure thing price. Actually, I’m going to draw it on the following graph, which shows the price and possibilities (or price differentials might be a more boring way to write it)…

aaron-hoos-writer-selling-dilemma-01-blank

Here’s what could happen if he put his house on the market. The house could sell for a lower price or a higher price. (Theoretically the line could go right to zero and could go substantially higher but the line below represents the likely sale price scenarios:

aaron-hoos-writer-selling-dilemma-02-market

Here’s what could happen if he sold his house to the buyer without actually listing it. The house would sell for a fixed price:

aaron-hoos-writer-selling-dilemma-03-offmarket

Putting them both on the same graph to compare them, you get the following:

aaron-hoos-writer-selling-dilemma-04-marketandoffmarket

There’s another price that I think is useful to know. It’s the price he bought the house for. And again, since I’m not displaying actual numbers here, the line represents his initial purchase price. Regardless of what he sells his house for, he’s going to generate some capital gain from the sale — whether he sells with the sure thing or by listing his house.

aaron-hoos-writer-selling-dilemma-05-3prices

The gamblers said that he should list his house because it was likely that he would earn a profit above his sure thing price. They felt that the money he could make above his sure thing price was going to be additional profit. They asserted that my friend was giving up a potential additional gain by going with the sure thing. They admitted that there was a possibility that the price could come in below his sure thing price but felt that the reward of the gain was worth the risk of the loss.

aaron-hoos-writer-selling-dilemma-06-gamblersguess

I, on the other hand, felt that the sure thing was the better choice. And the reason I felt this was because my friend is moving to another city and he’s starting his new job soon and has to also move with his wife and their young child. If he listed his house, he would have to commute back to Winnipeg to work on his house, and then go through the hassle of listing, showing, signing papers, etc., all while making the lengthy and expensive commute… and all while starting a new job.

On the other hand, the problems and headaches are immediately eliminated by selling now for his sure thing price. I asserted that the loss of that additional potential gain was the cost of the peace of mind that he would have to take care of that major stressor in his life. Although there was a potential gain, I argued that the gain wasn’t worth the amount of effort involved. Selling his house with the sure thing model was zero effort, zero additional cost, zero additional stress, zero additional commuting. Selling his house with the gamble would bring in potentially extra money but would cost in other ways.

aaron-hoos-writer-selling-dilemma-07-surething

Reflection: I called one a “sure thing” and the other a “gamble”. But in reality, both are gambles, aren’t there? By listing the house, my friend is gambling that the market will pay more than the fixed price he was offered. By taking the sure thing, my friend was gambling that the fixed price would not only be higher than one potential outcome of the market but also would be more rewarding because it would minimize the effort required to list his house.

I’ve tagged this post as a business, finance, and real estate post because it really does connect to all three. In fact, I can think of scenarios in the world of business and in the capital markets where this issue is a regular dilemma. And although it’s tempting to chase the highest dollar value as the most obvious answer, I don’t think that’s always the best answer. After all, there are costs and intangible rewards that could potentially be worth more than money.

What are your thoughts?

(Oh, and in case you’re wondering which one my friend chose, I don’t know yet. Last time I asked him, he hadn’t decided).

Prospecting more effectively in four easy steps — co-written with Rosemary Smyth

By Aaron Hoos on May 11, 2013 in Finance, Portfolio

This article was co-written with my friend, Rosemary Smyth, an international coach to financial advisors. The article is also posted on her website.

The success of many of the top-earning financial advisors hinges on their ability to simply get more clients. Although exceptions to this rule exist, the advisors who outlast their peers and are nearing retirement with a big book of business are usually those who did more prospecting (and more effective prospecting) earlier in their career. They are also more likely to have maintained the practice even when other advisors stopped.

Most advisors follow one of two routes when they go out prospecting. The first route, especially for new advisors, is to go after anyone you know or meet. Everyone gets a business card or three and a follow-up call. The other route, especially for professionals with a few years under their belt, is to follow the money by contacting whoever has the most likely access to investable capital.

We know that prospecting is essential. So how can an advisor – whether they are brand new to the business or trying to elevate a seasoned career – prospect more effectively in today’s marketplace? Just because the “tried-and-true” prospecting methods of yesteryear don’t work as well today, that doesn’t mean advisors should scrap everything and go all-in on the marketing flavor of the month. You might be surprised at the answer.

If you want to make your prospecting easier and more effective, and ultimately generate more clients for you, here are four steps to find the perfect prospects faster and more effectively:

Step #1 – Look in the mirror:
If you want to find your perfect prospect, the best way to get started is to look inward and figure out who you are and what’s important to you. How would people describe you? How do you like to spend your time? What values do you adhere to in your own life? What are your talents? What sets you apart from other advisors?

Once you’ve made this inward look, the next step is to look outward for prospects who might possess those same qualities. Where do they work? Where do they spend their free time? How can you connect with them?
People enjoy interacting with others who are just like them. Your prospects will see you as an ally who understands them and faces the same joys and struggles in life.

Step #2 – Look at your client list:
Your existing clients provide an excellent clue into who your perfect prospects are (even if you’re a new advisor with only a small handful of clients).

Look at your client list and identify your favorite clients – the ones you love to work with the most. This doesn’t necessarily mean that you’ll be looking for the ones with the most assets or the ones who generate most of your revenue. Instead, find the clients who you simply like to spend time and the ones who you really connect with; identify the ones who leave you feeling energized and valued as a professional.

Once you have a list of your favorite clients, determine what characteristics are common among all of them. Check for demographic characteristics, personality traits, aspirations, and values that are shared among a majority of your favorite clients.

Also look at what solutions you are providing for your client’s biggest problems. Does your experience with certain products or services make you an expert in working with those types of clients?

This step is critical because it starts to paint a picture of your favourite clients – the ones who give you a reason to get out of bed in the morning and face the day. Think about what you enjoy most about being an advisor and how your favourite clients make you feel.

Step #3 – Paint a picture:
Based on your findings in step 1 and step 2, describe what your perfect prospect profile is like:

  • What is important to them?
  • Who is important to them?
  • What values do they possess?
  • What motivates them?
  • How would you describe them demographically?
  • What personality traits do they possess?
  • Where do they spend their time and money?
  • Where do they typically work? Where do they typically spend their time when they are not working?
  • What events in life are they facing now or will they be facing in the near future?
  • What needs and challenges do they face that you can offer valuable insight into?

Craft an outline of what that person looks like and be able to describe that person if someone asks you who they can introduce you to.

Step #4 – Figure out where that prospect is and go to them:
Take a look at your perfect prospect profile and determine where they spend their time.
Review available prospecting methods against the picture you developed of your prospect profile. Do your prospects even see or hear your prospecting message and is it something that resonates with them? Are there specific prospecting methods you can adopt (and adapt, because it’s never one-size-fits-all) to reach deeper into that pool of prospects?

Bonus Step – Segment your client list:
As you add more clients to your business, you may want to revisit the level of service you provide to each client. By segmenting your client list into three simple groups – top tier, middle tier (who might possess some qualities you prefer and have the potential to become top tier clients), and bottom tier clients (who are definitely NOT your favourite clients!). Create service level agreements for each tier that ties into your marking plan and budget. Provide a richer, more valuable experience with more frequent connections to your top tier.

Some of the benefits of working with your top tier are:

  • Less stress as you are working with clients that you like
  • Stream-line your business as you work with similar clients
  • Focuses your marketing campaigns
  • You are seen as an expert
  • More revenue opportunities
  • Your time and effort is respected and valued

Finding perfect prospects ensures a stronger, enjoyable and a longer-lasting career as a financial advisor. Follow these four steps to find more perfect prospects.

Rosemary Smyth, MBA, CIM, FCSI, ACC, is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at www.rosemarysmyth.com. You can email Rosemary at: rosemary@rosemarysmyth.com

Aaron Hoos, MBA, has worked in the financial industry since 1997. Formerly a stockbroker, insurance broker, and award-winning sales manager, today he writes for the financial and real estate industry as an educator and marketer. He is working on his second book. Visit his website at AaronHoos.com and follow him on Twitter @AaronHoos.

4 qualities that a junior resource stock speculator needs

By Aaron Hoos on May 10, 2013 in Finance

I think there’s a rule in the stock market that says: “If you buy a junior resource stock today, it will immediately decline and then falter for quite some time.”

I’m joking, of course, but I think most junior resource investors will tell you that this has happened to them at least once (more likely: a dozen times).

I love junior resource stocks but they are not easy stocks to own! If you own junior resource stocks, or think you might like to own them, here are 4 qualities you’ll want to have. Trust me when I tell you: If you don’t have these qualities, don’t invest in junior resource stocks!!!

A PASSION FOR DUE DILIGENCE

It sounds like an oxymoron to put “passion” and “due diligence” in the same sentence. However, junior resource stocks are speculative and there are a lot of unknowns when investing in them. You’ll reduce the risks and increase the potential of gains by doing your due diligence first. Don’t make the mistake of just investing because someone you know has also bought that stock and is doing well with it.

Also: Due diligence is not a one-time even that you do once just prior to buying a stock. I believe due diligence is something you need to do over and over and over again — before you buy, before you sell, and regularly in between. Due diligence activities should be “triggered” by your own decisions and by external market forces. You should always be asking yourself: “Does this event change the reason that I bought the stock in the first place?”. Click here to learn how to do due diligence on a junior resource stock.

A B.S.-O-METER

There are many many many good people in the junior resource industry. They mean well, they’re hardworking, they’ve made some exciting discoveries, and they have some good insight to say. But there are the losers, too; the ones who see a junior resource stock as a great way to make some fast cash from an IPO before letting the company fall in value, or those who pump and dump stocks, making money on the gullibility of investors rather than the stock’s fundamentals. You need a very sensitive BS-O-Meter that can detect the slightest whiff of something being off.

EXTRA MONEY THAT YOU CAN AFFORD TO LOSE

I almost didn’t include this one because it is the most depressing of them all. But junior resource stock speculators should really be investing money that they can afford to lose. I’ve seen too many people who dump their life savings into stocks, only to watch those stocks decline. Don’t do it! The entry point to buying juniors is pretty low. So buy only with money you can afford to lose. This isn’t an alternative to buying a lottery ticket.

COURAGE

This is probably the biggest one. It was originally inspired by Rick Rule of Sprott Resources, an articulate thinker in an industry where those qualities are far to rare. He referenced courage in a talk he gave at an industry conference a couple of years ago and although he didn’t go into great detail about it, I think he was referring to these two types of courage.

Investors need courage to look past the unknowns: There are many unknowns in the industry and anything from politics to natural disasters to public sentiment can suddenly shift the stock price. So you need to do as much due diligence as you can to eliminate as many of the unknowns as possible, and then you need courage to live with the rest of the unknowns.

Investors need courage to act when their emotions are advising something different: All too often (and even in stocks that aren’t junior resource stocks), investors will buy when the price is high because everyone is excited about the stock, and then they’ll sell when the price is is low because they’re afraid of losing even more money. This all-too-common practice (ironically, even among conservative investors) is the exact opposite of what should happen. Investors should buy when prices are low and sell when prices are high. Of course, that sounds good in theory but it’s much harder to do in practice. Write down the reasons you bought a stock and then remind yourself of those reasons when you’re wondering “should I sell this stock?”

 

Investing in junior resource stocks is not for the feint of heart. It’s not for the weak-willed or people who love to jump on bandwagons. Only invest if you have these 4 qualities! I think it’s fun. But it’s also worrisome and time-consuming and mind-boggling at times! Invest at your own risk!

11 reasons why I love junior resource stocks

By Aaron Hoos on May 4, 2013 in Finance

Junior resource stocks are companies that explore and develop mineral/metal resources. Junior resource companies do one or more of the following activities: They get a property, explore for a particular metal, and then (if they find something worthwhile) they develop the mineral resource into a mine that generates cash flow.

Here are 11 reasons why I love junior resource stocks.

1. IT’S HIGHLY ENTREPRENEURIAL

The junior resource industry is highly entrepreneurial with a lot of businesses starting all the time. All that is required is a promising property and you can pretty much set up a junior resource company. That doesn’t mean people are going to invest in it, of course, but it does create some really exciting buzz that I absolutely love about the industry.

(Naysayers will point out that the highly entrepreneurial nature of the industry increases the risk of scammy companies that are bad investments. This is true. But it is also usually resolved when investors do their due diligence. In my opinion, the advantages outweigh the disadvantages.)

2. IT’S EASY FOR INVESTORS TO GET INVOLVED

While there are resource stocks that have very high stock prices, many — perhaps most — resource companies are “juniors”. That is, they are small companies with penny stock prices. This allows investors to get in at a low price, spending just a few hundred dollars to get a few thousand shares.

(Yeah, there’s a downside here, too: Penny stocks don’t have far to go to fall to zero. So if you’re going to invest, make sure you can afford to lose your money. In my opinion, a few hundred bucks isn’t a big deal to lose. I’m not putting my life savings in one penny stock!)

3. THERE ARE RISKS

There are risks to any junior resource stock: The underlying commodity might suddenly bottom out. Investor sentiment might turn away from the commodity or the company or the region they are operating in. Political risk is always present — in third world countries, you might end up with a crackpot dictator who takes over the mine; in first world countries, you often end up with excessive regulatory obstacles. I like all of these risks! They pose a challenge for the junior resource company and for investors. Smart companies need to figure out how to overcome those risks as much as possible; smart investors need to figure out ways to mitigate against those risks through their investing.

4. THE POTENTIAL IS THERE FOR BIG WINS

If you buy a blue chip stock, the possibility exists that the stock might go up. But the moves aren’t huge. It might climb slowly, advancing a small percentage each day when it does go up. These stocks are famously stable. But in a junior resource stock, stocks worth pennies can increase at a greater rate — going up by a significant percentage when they do rise.

5. YOU CAN LIMIT YOUR LOSSES

Stocks fall, too. And people who want safety and security in their stock investments will choose blue chip stocks because they aren’t likely to fall as much. But just as junior resource stocks can climb dramatically, they can also fall dramatically, too. However, since they have a low buy-in, you are only going to lose as much as you invest. So if you invest only as much as you can afford to lose then your losses are limited.

6. THE LAW OF SUPPLY AND DEMAND ALWAYS WINS

The market is the jungle and the strong survive while the weak perish. What influences strength and weakness is the fundamental rule of the markets: Supply and demand. The more you understand supply and demand, the better you’ll do in junior resource stocks. Supply relates to how much of the commodity is being readily mined and stockpiled; demand relates to how the commodity is being used. Increases in supply feed demand and drive the commodity prices down, which makes it less viable for a junior resource stock to operate; Increases in demand eat supply and drive the commodity prices up, which makes it more viable for a junior resource stock to operate.

7. EVERYONE NEEDS MINERALS

In general, the demand for minerals is there so a well-chosen junior resource company that is focusing on a specific in-demand mineral has the potential to do well. Minerals aren’t going out of style. Yes, specific minerals might rise or fall in price because of supply and demand but minerals as a whole will always be needed. It is the responsibility of the investor to figure out what minerals will be in demand and to invest accordingly.

8. I UNDERSTAND IT

There are many penny stocks out there, not just junior resource stocks. There are tech and biotech and greentech, for example. The problem is, I don’t understand them. I’ve spent some time studying the resource industry and junior resource stocks in general so I’m comfortable working in this industry.

9. SUCCESS COMES FROM DUE DILIGENCE

I love due diligence. I love to roll up my sleeves and research companies to find out what makes them tick. It’s not easy and other people don’t like doing it, which is probably why I like doing it all the more. Here’s a blog post I wrote about how to do due diligence on a junior resource company. While you can’t eliminate all risks with due diligence, you can identify many of them and that allows you to deal with them as much as possible. The other risks (the ones you can’t mitigate) are just part of the fun.

10. THERE IS AN OPPORTUNITY TO SPECIALIZE

Junior resource stocks are basically their own category but within that category are sub-categories: You might specialize by mineral type (gold, silver, graphite, etc.), geographic location of mines (South America, Africa, etc.), where in the mine lifecycle a company operates (explorer, developer, etc.). By identifying a few specializations, investors will feel far more comfortable navigating the complex supply/demand equation because they are more familiar with a specific mineral.

Of course that doesn’t mean you don’t invest in other sub-categories, but a specialization helps you to focus bit.

11. THERE ARE MANY PATHS TO SUCCESS

I also love junior resource stocks because they have many opportunities for success, which (in turn) impacts the stock price. The most basic path to success for a junior resource stock is to find a resource and mine it, eventually earning cash flow from the production of the mineral. But that’s not the only way they can succeed. They can be a prospect generator, finding resource deposits and partnering with others who will bring those deposits to production; they can do a joint venture with a company to bring the deposit into production (which is similar to the prospect generator method but maybe with a bit more control over the process and skin in the game); they can sell the project to another company (we’re seeing a lot of this in the industry right now); they can be acquired by a major producer; they can split the company into multiple companies (which happened recently to one of my holdings — I know own three very good companies instead of one). There are even other creative ways to succeed as well — I just heard of one company that not only mines its own products but it also owns a mill that mills ore for nearby mines as well.

 
There are risks to junior resource companies and you should never trade these stocks if you aren’t comfortable with the risks. It’s not for everyone but I love the challenge, the opportunity, and the edge-of-the-seat excitement that comes with this kind of trading.

Yes, you CAN time the market (just not in the way you want)

By Aaron Hoos on May 1, 2013 in Finance, Real Estate

You can't time the marketTiming the market is the most ridiculous idea out there. (Well, maybe not the MOST ridiculous idea out there but it’s pretty out there and it’s pretty pervasive so maybe it’s high up on the list).

The thinking behind timing the stock market goes something like this: “Oooh! I want to buy that stock. But the price is too high right now. Maybe I’ll wait until the price goes down.”

And then when the price does go down, the thinking changes to: “Ouch! I want to buy that stock. But the price is low and what happens if I buy it and it goes lower?”

This is true for real estate, too. A potential homebuyer might say: “Whoa! Houses are too expensive right now. I’m going to wait until home prices come down a bit before I buy.”

But when the sellers market becomes a buyers market, the potential homebuyer now says: “Yikes! House prices seem to be declining. What if I buy and the house declines even further in value?”

I hear this line of thinking OVER AND OVER AND OVER AND OVER. I heard it when I was a stockbroker and I hear it today in my work with financial and real estate professionals. I’ve tried to talk people out of this thinking but it can’t be done. (And the truth is, sometimes I fall into the trap, too!)

Like some optical illusion, the price of a stock or a property is never perfect right now and investors believe that by waiting, they can buy it at a “better” time.

Unfortunately, there never is a better time. EVERY price point has its advantages and disadvantages. Unfortunately, investors only see the disadvantages to buying now (regardless of price point) and the advantages of buying later (regardless of price point)… and they don’t seem to remember what they said only a few months ago when the price was different.

And waiting for a market bottom or market top is impossible because it takes months of data from indicators (including lagging indicators which come after the event) to prove a market peak or valley.

Timing the market is a fools game because investors and homebuyers are always looking for the perfect price point (even though they often can’t identify what that price point is and, even when they do, they fail to act when the price reaches that point).

Timing the market is ridiculous idea and a fools game… but it’s not impossible. You just have to rethink what you mean when you want to time the market.

Joe Average and Jane Average (Mr. and Ms. Average to you) try to time the market but they fail. There are people who CAN effectively time the market. I’m talking about short term traders. Short term traders (day traders and swing traders in the stock market, and real estate investors such as flippers in the real estate market) can time the market and many of them do pretty well at it.

Here’s why some people can time the market but most people fail at it:

  • Information volume and prioritization: Successful market timers do it effectively because they receive a barrage of information and they filter out what they don’t need. Compare this to Mr. and Ms. Average who glean tidbits from headlines or from the half-wits around the watercooler at break time and act on each piece of limited info that they get, as if the latest piece of information is the most correct.
  • Entries AND exits: Successful market timers consider both entry and exit positions before they buy. To a successful market timer, an “expensive” stock is still cheap if the price goes up and a “cheap” stock is still expensive if the price ends up going down. The same goes for those in real estate. It doesn’t really matter what the entry point is… it’s how much you can sell it for afterward when you are ready to sell. Compare this to Mr. and Ms. Average who likely intend to hold their stocks for decades and who will have to live in their house. They are making entry-only decisions and forgetting that there are other (hard-to-measure) aspects to owning these assets.
  • Mindset: Successful market timers view the (financial or real estate) markets as their “business”. They make money from it. Therefore, they make decisions from a business perspective. The Average family, on the other hand, is looking at buying stocks for their retirement portfolio or their next home and they are trying to weigh their decisions on a much more personal level, which makes the stakes seem higher.
  • Buying a range instead of a single price point: Successful market timers don’t look to one specific price point as THE bottom or THE top. Rather, they expect to buy a range, buying through the bottom and selling through the top and fully realizing that they might miss a few points here or there but overall they are hitting it at the right time. Mr. and Ms. Average, though, see every single low price point as a question (“is this the bottom or will it get worse?”) and every single high price point as the top (“is this the top or will it continue to climb?”). In a way, they are making a technical trading decision without any technical information.

Don’t bother trying. You cannot time the market… at least, not in the way that you want to time the market.

 

Image credit: 2020VG

How financial advisors can plan for success

By Aaron Hoos on April 12, 2013 in Finance

Starting and running a financial advisory practice is a lot of work. (I know. I’ve done it!).

There are a million different strategies and tactics — some dictated by your industry, some dictated by your firm, and the rest dangle before your eyes like a shiny promise.

So how do you grow your business? How do you sort through the options? How do you make sense of it all? How do you stay sane when times are busy? How do you stay sane when times are slow? What are the things you should do when you’re first starting out? What are the things you should do after you’ve been running your practice for a few years?

Those are huge questions — and advisors need to work through them if they are going to survive in this high-turnover business.

To help answer those questions and provide financial professionals with some guidance, I’ve teamed up with Rosemary Smyth, a business coach who specializes in helping financial advisors.

She and I wrote the article Tomorrow’s Success Starts With Today’s Planning: A Step-By-Step Guide to help financial advisors plan more effectively and succeed more quickly.

A version of the article also appeared in these other publications (and elsewhere):

The error of the “good investment”

By Aaron Hoos on February 6, 2013 in Finance

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).

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