A Cautionary Tale For New Investors

A True Story With a True Ending

When people find out that I trade stocks, they either ask questions about what stocks to buy or they start telling me things they probably don’t tell a lot of people. The following story is true. Others have told me similar stories to this one I’m about to tell.

I once met a guy who worked in the movie industry who was very interested in what I did. He told me that he lost $10,000 in a stock. He explained that he met a guy who worked in the financial industry who reeked of success and seemed to really know his stuff on stocks–an expert! This ‘stock pro’ knew of a new company whose stock was very cheap. He owned a bunch of shares and got most of his friends and family shares because the opportunity was too good to pass up. This company was going to IPO (start trading publicly in the stock market exchange) and sell shares at a much higher price at the open. Yes! Easy money. That’s how we all like it!  

Movie Guy wanted in on this opportunity too, so he gave Stock Pro $5000 to buy shares. For a while, nothing happened. When Movie Guy asked about it, Stock Pro said there was stalling in the stock exchange paperwork, which is typical when companies try to go public. Stock Pro insisted it was to happen soon and they anticipate the price on the opening day to be even higher. It was going to be such a good trade that Stock Pro put in more of his own money to buy even more shares. Movie Guy didn’t want to miss out on this better opportunity so he gave Stock Pro another $2500. The same thing happened again later and he handed Stock Pro another $2500. He only stopped at $10,000 because he never heard from this so-called expert again. 

I asked Movie Guy what brokerage Stock Pro worked at. He didn’t know the name of the brokerage, but this guy had an office where the transaction happened. He filled out obscure paperwork, signing that he understood the risk of investing in securities–the paperwork was just a formality though since this stock was virtually risk-free and was going to be worth so much more when it opened in the exchange. I asked him the name of the company that was going to IPO. He didn’t even know exactly.  

I wish the ending to my story wasn’t true, but it is. Movie Guy never got his money back. He was too busy to pursue Stock Pro or even investigate the companies involved. And here’s the kicker: He then offered me $20,000 to trade for him. I flat out said, “No way. Never do that.” I also should’ve told him to re-watch Boiler Room.

The thing is, you could really make money in this situation if it were legitimate. Movie Guy could’ve looked more into this new company with the help and advice of a financial professional.

This kind of story usually gets two responses: “That person is so stupid,” or, “That’s why I don’t invest.”

My answer to the first response:

Movie Guy was actually a smart, successful man. He was simply naive and too busy to watch over his money. He was, however, stupid for offering me money after what had already happened to him. A lot of professionals (like doctors) are typical targets because they work long hours and don’t have time to figure out the best way to invest their money. They’re also often too busy to follow up on their money until it’s too late.

The truth is, if Movie Guy had gone to his bank where his money was already safely parked, seen a financial advisor, and invested it in mutual funds (which are ideal for new investors or very busy ones), he’d have been so far ahead by the time that scum bag got to him, he probably wouldn’t have been interested in what this guy was promising.

Often, people who’ve been sitting on their un-invested money for too long get impatient. Then, when something promising comes along–like a friendly person with specialized knowledge, unique abilities, and the holy grail of a ‘tip’–they’re so tempted and ready to hand their money over to that person who’s telling them exactly what they need to and want to hear. People have a hard time passing up an easy opportunity, so these predators get all polished up, sell you a story, and promise performance in order to get your money.

A real financial professional should tell you more than just the upside and discuss what risks are involved. If they don’t, then ask them. A little tip: The more reward an investment has to offer, then expect the risk to be higher. A big tip: A person who promises with certainty big gains is most likely lying.

My answer to the second response:

You have to invest, life just got too expensive not to. Don’t let scary stories stop you, let them teach you. I just created a great short cut to understanding investing by writing the shortest, easiest book to understand –ever. I arm you with knowledge so you know what investing looks like, how investments work, and what clues to look for in a good advisor and a solid financial institution. I also provide you with good questions to ask your financial advisors.

So how do you know who to deal with? Well, I’ve talked to many financial professionals over the years for various reasons. The best advisors are patient, clear, courteous, genuine, professional, honest, non-judgemental, and knowledgeable (and if they’re not sure about something, they check, they don’t guess).  I’ve dealt with ones who lacked one or some of these traits–not everyone’s perfect, however, these qualities are very important in an advisor and they are the industry standard.

In general, your gut tells you if you don’t like a person, even if everything on the surface seems to add up. It can seem different in an unfamiliar setting when you’re meeting with financial professionals, but don’t let your lack of financial knowledge cloud your judgment. If you don’t like how they’re interacting with you, they have no right to handle your money. Just politely shorten your meeting, say you’ll think about it, and call back to make an appointment with another person. If you notice it’s a pattern with your financial institution’s staff in general, then switch. I’ve left a bank and a few brokerages because I was so irritated with their staff and I’m so happy with the places I’m at now. These folks should be competing for your money by offering you the best services and commission rates.

In Canada, we have the Canadian Securities Administrators who enforce regulations and discipline individuals and companies who commit infringements in the financial industry. On their website, they keep a list of violators. This doesn’t mean if a person or company isn’t there that they’re okay, but it could be a matter of time before they’re investigated and disciplined.

Now, compare my first investment story with Movie Guy’s story… 

I was 18 when I inquired about investing for the very first time, I dealt with a bank advisor named Tammy. She was the boss of her unit and she was very busy. Over a period of a few months, I visited Tammy and asked her to explain to me over and over again, what the heck the RRSP was (this was before the internet). I just couldn’t wrap my head around the concept of tax-deferred money as I only started working at my first job and hadn’t paid taxes yet. Sometimes I dealt with other staff, who were also nice, but I liked her the most.

I’m sure I was giddy, nervous, and possibly annoying. But Tammy was warm and patient: she walked me through everything and always made notes for me to follow along. It was probably on my fifth visit that I finally opened my RRSP account and made my first investment of $500 in a term deposit! The most important part is that it was my first investment of many.

Real financial professionals are respectful of your needs and concerns. They are more interested in forming a long-term relationship with you to help you with your financial needs throughout the various stages of your life. This means you can walk in, meet with someone for half an hour and walk away feeling valued, even if you didn’t invest in anything yet. Professionals shouldn’t be overly charming, pushy, persuasive, aggressive, or deceptive. They also shouldn’t make you feel rushed or that your money isn’t enough to make you a VIP. Real professionals understand that it’s challenging to part with your money, so they’re there to help you with what you need until you’re ready to take action with your financial plan. 

Have any questions, stories you’d like to share, or topics you’d like me to cover? Contact me anytime!