Do you “look before you leap?” when investing?
I am not a fan of cats. That is probably the reason why I laughed so hard at this video, even after replaying it 25 times! This cat, we’ll call him Mr. Fluffy McKnowitall, takes a long look at the camera. After seeing he has an audience, it seems as if he is saying “watch me, I’ve got this”. He takes one look at his destination, coils for the leap, then something totally unexpected happens.
This got me thinking about the past 20+ years in this business, and just how many Fluffy McKnowitalls there are when it comes to investing. Many “Investing Jump Fails” are a result of overconfidence, too much trust, and not conducting proper homework. Some examples:
- I had a front row seat to the late 1990’s tech bubble, which as we know ultimately burst. We had a guy in our office who was so confident that his fortune was to be made trading tech stocks, he actually quit his job as an advisor and set up shop with his home pc. Needless to say, his new career ended in spectacular fashion when the NASDAQ fell off a cliff. How Fluffy-like!
- In a recent previous life, I recall visiting one of the top advisors in our firm, both in assets and commissions. After asking him how he had achieved so much success, with a straight face he told me that he could always pick the mutual funds that would be in the top 10% over the next five years. The sad part is that over the past few years his clients probably believe the BS, as the markets have only gone up. I’m sure there will be a day of reckoning for this Fluffy and his clients, as this advisor also touted leverage (borrowing to invest) as one of his favourite strategies.
Too Much Trust
- Over the past few years, a well-known investment failure has dominated headlines. By chance, I was speaking with one of the investors, as she had been referred to me. The elderly lady mentioned to me that she invested much of her life savings in this project. She could not comprehend that most, if not all, of her life savings were probably gone. The most shocking statement she made was “How is Fluffy? (the investment manager, real name withheld) He must be under a lot of stress, I hope he is doing okay.” First of all, I have no clue how Fluffy is, never met the man, nor do I care to. Second, it shocked me to learn that this lady still had blinding devotion for the former “man of God”, even after it appeared he may have taken her life savings away.
- Back in the early 2000’s, I had a brokerage client who formerly worked for Bell Canada. As a result of the Bell shares this gentleman had accumulated over the years, he ended up with 5000 shares of Nortel Networks. At their high of over $100/share, this investor’s stake was worth more than $500,000. Nice windfall! Unfortunately he trusted “conventional” wisdom a bit too much, including Nortel CEO John Roth being on the cover of Maclean’s as CEO of the year, and the brokerage reports placing a target price of $200 and even $300+ per share. After Nortel dropped to $1, this person’s Fluffy-like experience was probably a combination of trust and greed.
Not Conducting Proper Homework
The best example of an investment failure that could have been, to a great extent, prevented, was the biggest of them all, “Fluffy” Madoff. Harry Markopolis, the man who uncovered the Madoff scandal, started investigating Madoff’s trading strategies in the late 1990’s. In his 60 minutes interview, Mr, Markopolis stated “It took me 5 minutes to know that it was a fraud”. Madoff’s track record was so good that it would be equivalent of a baseball player hitting .960 for the season! (.300 is considered an excellent batting average).
How Madoff fooled all of Wall St, the regulators, and investors for so long is baffling, considering it took one math guy 5 minutes to figure it out 10 years prior to the fraud being publicly uncovered.
Tips to Avoid Becoming “Fluffy, the Investor Jump Fail”
Dealing With Overconfident Salespeople- Have you ever been pitched an investment product by someone that you instinctively know has more “BS than brains”? These people are usually very charming and charismatic, and know all the right things to say, but lack any real substance when it comes to the facts. Realize that many times, the overconfidence could be compensating for a lack of real knowledge and investing acumen.
Trust, Then Verify– It’s fine to listen to an investment presentation from someone you trust, perhaps a friend, family member, referred professional, or even clergyman. Just do not sign anything until all of the facts are verified. If you don’t know all of the right questions to ask, take the time to find a financial professional, lawyer, or accountant to make sure all of the information represented is indeed factual. Do not invest until you receive confirmation of the facts presented.
Do Your Homework, or Find Someone Who You Know Does Theirs- There are many different levels of sophistication in the world of investing. One method is for you to take matters into your own hands completely, and become a pro yourself. Another is to find a pro, someone who has the knowledge, experience, perspective, and expertise to be able to make recommendations with your interests first, not just to make a sale. Rolling up your sleeves, and making sure the advice you receive contains these characteristics, can avoid big mistakes and pay dividends in the long run.
The short and funny “cat fail” video can actually teach us a lesson about investing. You need to be extra careful before you invest, because by the time something goes wrong, it may be too late to do something about it.
For more information on how top institutional investors avoid the common mistakes described above, download the free Guide to Real Asset Investing, located to your right.