I bet my friend is going to be very unhappy soon. This is a story about her, but first let me tell you a story about my company’s board of directors.
We had an exciting deal and we were feeling good. But when we took it to our board members for their advice–they’re entrepreneurs with much more experience than we have–they were lukewarm on the idea. Actually, they told us we were being stupid: “If you don’t get this deal, you lose. And if you do get this deal, you still lose because the margins are so low. You lose either way!!”
When No Good Can Come of This, I am very wary.
So, back to my friend. She IMd me yesterday and told me that her manager had a hot stock tip and should she get it? The stock had jumped over the past 3 months and he’d tripled his money.
With only that information, I told her that she would be stupid to buy the stock right away. First, is her manager really the best source of information? Second, if it’s jumped 3x in the last few months, isn’t it possible she’d be buying it high and later selling it low?
Also (god there are so many reasons this is a bad idea):
- Was she going to do any research on the stock on her own?
- Is 3 months really enough time to tell anything at all? Look, my arms look big today but that doesn’t mean I’ll be a muscleman in a month. Christ.
- Did my friend understand what the company does, how its products are, and how the competitive landscape is? What about revenues, costs, etc?
- And so on
She decided she’d probably invest anyway. Ok, her decision.
But here’s the clincher: Even though she has a great income, she is only putting in $500-$1000 for the stock so she can hedge her risks.
This strikes me as pretty weird: If she does really well, she’ll wish she had put more money in; in other words, she’s hedging herself out of any real success. And if the stock tanks, she loses all her money.
Either way, she loses! No Good Can Come of This.
Now, I see a lot of value in starting slow and not putting all your eggs in one basket. But if you’re not putting in more money because you haven’t done any research on a stock, that’s dumb. By doing a real, fundamental analysis, you can gain at least some certainty/information about the stock. And then, you can decide to either (1) invest a real amount (by her salary standards) or (2) not invest at all.
Yes, investing is a risk. But if your 2 potential outcomes are bad, that’s a bad investment.
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