The Golden Rules of Investing: Part One
There are a few golden rules of investing that I’m going to tell you about in a series of three pieces. The first investing rule begins with a story, and it goes like this…
Forty-five years ago, my partner came into my office beaming with excitement.
“I know you don’t invest in stocks,” he said. “But let me tell you a story…”
Along with a dozen other investment newsletter publishers and financial journalists, he had been invited down to some Latin American country — it might have been Costa Rica — to inspect a new technology. It was a mineral-processing machine, one that was able to extract gold dust from volcanic ash.
He was skeptical at first, he told me, but when he saw the machine operating with his own eyes, he invested in the company that owned it immediately.
First, he said, he listened to a presentation by a geologist who provided proof that there was gold content in the ash and explained how the extraction worked. Someone else, a professor of geology, provided a short history about past efforts to reclaim gold from sand and explained how this was different.
And finally, my boss and his colleagues were taken to the site where it was all taking place, a fenced off area near the ocean where the extractor had been installed.
At one end of the machine, local workers were shoveling in volcanic rich sand. At the other end of the machine, gold dust was being excreted. And if that wasn’t proof enough, they had an independent geologist there to confirm the quality of gold.
He could see from the expression on my face that I, too, was skeptical.
“Hey. I told you,” he said. “I saw it with my own eyes!”
“But isn’t that alchemy?” (Until that moment my entire experience with the creation of gold had come from reading classical mythology.)
“I’ll send you the reports,” he said and stomped out of the room, disappointed.
There is nothing that inspires us more than a good story. My partner’s disappointment with my reaction was an understandable response to his conviction.
He had heard a story, one that seemed implausible, travelled all the way to Central America to check it out, and had concluded it was legit. It was a bonanza! And I couldn’t see it! He was already counting the money he was going to make by investing in it. And he wanted me to be excited, too.
The Golden Rules of Investing
Despite my reluctance he brought the story to a half dozen investment writers that worked for us at the time. Some of them, like me, didn’t believe it. But some did. One at least wrote about it in one of our investment publications.
A few months later the story was in the mainstream press. But not as a big discovery. It turned out to be a complete fraud.
It was uncovered when a competitor of ours, a publisher who was also invited down to witness the amazing machine, but who happened to be fluent in Spanish. He told me later that asked one of the workers how many hours a day he worked. “Oh, we only do this when the Gringos come into town,” he said.
“Why didn’t you say something?” I asked him.
“Your boss really went for it,” he explained. “I didn’t want to hurt his feelings.”
Stories sell. And the brokerage industry understands that. That’s why, when you get a call from your typical stock broker, he will gloss over the facts in order to give you a full account of the story behind the stock. A golden rule of investing is simply recognizing these stories.
There are actually three very common stories that stock promoters tell:
The Revolutionary Technology
It might be a new kind of microchip or a cure for cancer. Stories about world-changing innovations are intrinsically compelling. Written well, they have the emotional impact of a good movie.
The Soon-To-Be Signed Contract
Nothing great is going on with the company now but they are about to make a deal with some huge, usually undisclosed partner that will send their sales soaring and thus the price of the stock.
The Legend Does It Again
The company’s president or founder was “behind” one of the biggest growth stocks in the last ten years. Now he is turning his attention to a new business that nobody knows about but you.
As a marketing advisor to the investment publishing industry for nearly 40 years, I know the power that such stories can have. My clients use stories to sell investment publications and stockbrokers use them to sell stocks.
When you buy a financial magazine or newsletter that disappoints you, you can always get your money back. (At least you can with my clients). But if you buy a stock based on a story and don’t like it, you are stuck with what could be a very bad investment.
Stories are compelling but know this: there is no correlation between the quality of a story and the quality of the investment it represents.
And that’s why, when it comes to investing, and the investing rules, you should take a very skeptical view of stories. That’s why you should always keep in mind this golden rule of investing. Rather than be swept away by good stories, ask questions, lots of questions, and then buy investments based on the facts.
Want to read more from Mark?
You can find Mark’s books on Amazon. Here are a few of our favorites:
Living Rich: How To Live As Well As a Billionaire on a Middle Class Budget
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(Editor’s Note: The links to the books above are affiliate links.)