Although I am no longer working as a financial advisor, sometimes I just can’t get away from being asked financial questions. I just got back from my annual golfing trip to Orlando. The conversations, over a few drinks, are usually about our golf game. However, some of my golfing buddies just have to ask for my opinion regarding their investing ideas.
Here are just a few examples:
Question # 1 – “I saw advertised on T.V. an investment opportunity in real estate where your money is locked in for 3 years but they pay 8% interest on your money. What do you think”?
Answer: “I would have to look at all the financial terms and conditions to give an accurate opinion. However, I have come across private funded rental real estate in the past. Developers can only get bank financing based on long-term lease agreements which are signed before construction begins. Your money goes to build additional units that the developer hopes to lease out within three years. It usually sounds like a safe investment but there are no guarantees that you will get your money back or that the rate of interest will not change.”
Question # 2 – “I own shares of Crescent Point (A Canadian oil & gas producer) and they are trading 40% below my purchase price. Don’t you think that the price of oil will go back up”?
Answer: “No, there are 3 billion barrels of oil world-wide sitting in storage tanks and in oil tankers hoping that the price will go up. At $40.00 a barrel, Crescent Point is losing money. They have stop their dividend re-investment plan and are slashing costs, budgets and streamlining operations in order to cope with low oil prices. If they are not successful, they will soon be force to cut their dividend and the stock will fall even further in price.”
Question # 3 – “I have $10,000 in a play money investment account. I was thinking about buying shares in Bombardier (A Canadian manufacturer of planes & trains) because the share value is so low and the shares could bounce back up. What do you think”?
Answer: “Not a good investment, just because the share price is only $1.28 doesn’t mean that it is a bargain. Bombardier has cost overruns on its “C Series” planes and can’t deliver them on time. The city of Toronto has an order for new subway cars that should have been delivered over a year ago. It is a poorly run family business with dual class shares so you have no say in the matter. The debt level is so high that there would only be $.03 a share left over if the company sold all its assets to pay off creditors.”
Last year I was asked about IBM. I told my friend that he should convince his wife who just retired from the company to sell her shares. The IBM shares were trading around $185.00 U.S. at that time.
This year I asked him “Did you convince your wife to sell IBM”?
He answered “No, she still owns them, she is emotionally attached to them and she is worried about paying tax”.
I responded “Not to worry, the stock is down to $132.00 and it won’t be long before the stock falls back down to her original purchase price eliminating any tax worries.”
Another friend of mine suggested last year, that I should buy some natural gas stocks because gas prices tend to go up in the winter time. He owned some shares in Encana at around $21.00. I told him that there was an over supply of natural gas due to fracking and that I was avoiding natural gas stocks.
This year I asked him “How did you make out with Encana, did you have a stop loss order on it’?
He answered ” No, I still own it!”
I responded “Really, that’s too bad!”
(the stock is currently trading at just under $11.00)
- Do your homework on investment ideas that you see on T.V.
- Oversupply of oil takes a long time to rebalance
- The low price of a stock has no bearing on its true value
- Don’t let tax concerns stop you from taking a profit
- Admit you made a mistake and take the loss
I rarely give out stock picks to friends because no matter how many good quality picks you give them, they will always remind you of the one that was a poor performer. The average investor doesn’t realize that even the best stock pickers admit that they are lucky to be right 60% of the time. Financial success comes from letting your winners run and cutting your losses early.
In my experience, most people tend to have an aversion to losses. In fact, most studies in human behaviour suggest that losses are twice as powerful, psychologically, than gains.
Watch out for alligators when golfing in Orlando!