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!


Reading Price Charts

XICAt first glance, it looks like the outline of a mountain range, but it’s a price history chart of an exchange-traded fund (ETF) which is an investment fund that trades in the stock market. There are many different styles of charting with a variety of analytical tools and measurements that you can apply to these charts to help predict the price direction. You can look at the price chart of any investment be it a stock, ETF, mutual fund, etc. There is no sure way of predicting price movement, but I find it useful to examine previous and current trends before buying any stocks. Today, I just want to go over what I see when I look at this chart because I’m interested in how the Canadian stock market is performing.

This ETF is the iShares S&P TSX Composite Capped Index Fund. This ETF trades on the Toronto Stock Exchange (TSX) under the ticker symbol XIC. It currently has shares of 235 of the largest TSX stocks. Looking at the price history of this particular ETF will give you a good idea of how the Canadian stock market is trending. There is a number of other similar market ETFs, but I like to look at this one. So what do I make of this?

Let’s look at the chart below. I drew some trendlines on the chart to mark the trend directions.

XIC with TLsA: Since early May last year, the market has been on a decline until the end of the year. There were big drops in August and September, followed by a bit of recovery in October. Despite these efforts to go up in the fall, the market maintained its downtrend from spring until the end of 2015.

B: This pessimism in the market was punctuated by a rapid sell-off in late December to mid-January. Has the selling come to an end? I would need some confirmation first before I buy any new stocks.

C: Since mid-January, the market has been recovering. It was only interrupted by a sharper drop in mid-February, but never quite hit the same price lows that we saw in January. This is often a positive sign confirming a turnaround and a good time to buy stocks, which I did myself. The market has been trending upwards since. It’s now the end of April. Will the market continue to go up from here?

Let’s look at this chart a different way. Below, you can see that I removed the trendlines and I drew a horizontal line to look for areas where the market might find difficulty moving through.

XIC with Line

I can see that in October last year, there was a lot of trading around the $22.00 area. I drew a line from there to where we are today. Interestingly, we are currently trading in the same price range.

For investors who bought shares in January and February, this may be a price range that they targeted their investments to go. They might decide to sell some of their shares here or hold on and wait for the trading to occur above $22.15 before they buy more. Will we go up from here?

There’s a popular saying, “Sell in May and go away.” This refers to a lessening of equities investing as we enter summer and this goes until the end of October. It is also worth considering that on June 23, there is a referendum among UK citizens that will determine whether or not the UK will remain an EU member. I think that whether or not the ‘Brexit’ will happen, the results will impact the overall market which could send it much higher or much lower.

My Own Trading

Since February, I had been systematically selling half the shares of the stocks in my portfolio that had doubled in value. I will keep a watchful eye on my stocks to see if they’re prone to a May sell-off or possible market shifts in late June. I’ll either stay in these stocks going forward or sell the rest of my shares depending on their performances.

I trade stocks in the short-term to make quicker profits. Sometimes this is a good plan, other times it means missing out on enjoying bigger profits because I got out too soon. I realize that shorter-term stock traders like me are considered by some as market parasites, that we’re only there to profit from smaller price movements and our money adds no real value to a good company’s stock. This sentiment does not hurt my feelings–this girl’s gotta eat!

True investing differs from just trading: it means being invested for the long haul–you buy shares of a company you respect, receive dividend payments, and you watch its value rise over the years. I do have a few of these too–for these stocks, regardless of what happens from May, I’m all in and for a long time. I may even buy more shares of these stocks in the future if I see good opportunities in the market and in these stocks’ performances.

There are also critics who think that analyzing price charts is just as effective as using tea leaves to make predictions. I don’t totally disagree with this opinion as I simply can’t predict anything with absolute certainty (neither can anyone else, as certain as they may feel).

Analyzing trends in the stock markets and in sectors is simply a way for me to anticipate direction. When the markets are going up, investors are optimistic; when the markets are heading down, investors are pessimistic. I don’t have a crystal ball that will tell me for sure whether things will go as I predict, or if some world event will occur to really rock the markets. I simply rely on my plans on when to buy and when to sell, I read the price charts to find these signals, and I consider what is going on in the economy and in the world that could affect a change in investor sentiment.







Your Special 4/20 Newsletter: Medicinal Stocks

v2 420A friend’s mother once asked me and my man what would be a good cannabis company to invest in as she wanted to buy stocks of that sort. This question caught us off guard–it was almost as if this sweet retiree was asking us where she could get good weed. She clarified that she wanted to invest in a company that was mainly in the business of medicinal cannabis. Oh medicinal! But of course. Her interest came about after Colorado and Washington legalized marijuana use. T
his is actually a question I get asked a lot as more people anticipate widespread legalization. I’m sure many other stock investors are asked about cannabis companies frequently, or at least from time to time (right?). For any new and exciting industry, who doesn’t want to profit from getting in early? With all the talk of legalization in Canada, the stigma of marijuana’s medicinal and recreational use will fade, or at least its reputation will be less shady. If and when this happens, you’re better off having seized such opportunities sooner than after the industry has boomed and the stocks have become more expensive.

The research we conducted for ‘Ma’ was actually difficult because many of these cannabis companies looked similar to one another. Many of them were a bunch of small businesses that came together to form a larger company; many outlined plans to dominate all corners of the cannabis market from production and retail to medicinal research and pharmaceutical use; most were quite new in the stock market; the stock prices were cheap and in similar price ranges; and they all promised expansive growth–in both the corporate and hydroponic sense. There is typically more speculation with younger companies; what’s interesting is that many of these cannabis companies are in a newer and developing industry that is slowly gaining acceptance and becoming incrementally less illegal.

As one who looks at a lot of stocks, I am always suspicious of hype and headlines. This is because I often find that by the time the news gets announced, it’s too late–the best buying opportunity has passed. Before I buy any stock, I like to look for clues first within the sector and the economy. Is the hype over? Is there an important upcoming meeting or announcement by the government that will affect this sector? Is the sector more stable and less volatile than the overall stock market? Or is the sector overheated and likely going to experience a bit of a sell-off? Will a company be announcing its quarterly earnings soon? I consider these things in addition to checking out a company’s fundamentals that point to a solid foundation, such as healthy financial data, plans for future expansion, and developments in products and services. Then I check if a company’s stock price has stabilized and I try to anticipate what might be a good price to get shares at in the near future. 

There are many cannabis companies in Canada. I took a look at some companies that trade on the TSX Venture Exchange (the stock exchange for newer and smaller Canadian companies):

Canopy Growth Corporation | Ticker symbol CGC.V | Price per share at today’s open: $2.60

Aphria Incorporated | APH.V | $1.56

OrganiGram | OGI.V | $1.10

Mettrum Health | MT. V | $1.66

Emerald Health Botanicals | EMH.V | $ 0.17 

I’ve got my eye on a couple of these companies. I won’t buy too many shares, I don’t want to risk much, but like Ma, I don’t want to miss out either. I’m willing to risk a bit of money to hopefully enjoy significant gains later. Before the end of the trading day today, on this celebrated date of 4/20, I will probably buy my shares of legalized cannabis. 

What 507 Days of No Shopping Can Do

For so long I got by with a minimal wardrobe consisting of basics, all of which could fit into a box. Everything I bought involved a minimum of two-weeks’ meditation where I considered an item’s durability, versatility, and impact on my budget. I can sew, so anything that got a hole or a tear was tended to with some mending, gentle handwashing, and TLC. Life in my 20s was eventful, full of travel and soul-searching adventure–I didn’t need or want a lot of physical baggage to weigh me down or distract me.

RackAs I hit age 30, I went down a different path. Until this day, I’m not entirely sure of the forces that affected me subconsciously, but it was likely a combination of a toxic relationship, major family problems, a lack of ambition, no big goals to save for, greed, and pure vanity–I don’t know why exactly, but I started to shop for clothes at an addictive level. Filling up bags at thrift shops and sales racks was so fun and only put a small dent in my monthly savings; this practice was enough to fuel an insatiable habit that got increasingly worse. Getting compliments on my fashion choices validated my actions and provided me with the justification to keep going, and even attain more expensive pieces. I should also mention that my level of going out for food and drinks was in-step with this out-of-control shopping.

I think at some point everyone gets a wake-up call. My wake-up call was a more of a long, sobering conversation that lasted for a couple of years. There was no question that I had to make some fundamental changes in my life. Every day I woke up feeling this deep, internal groan; I reluctantly plodded along, knowing some much-needed introspection was in order. My wake-up call was also doled out in punishing stages, much like the ancient plagues but on a smaller scale and onto one person. I found myself suddenly single and, for the first time in my working life, in some debt. This new situation was later accompanied by a bed bug invasion, personal tragedies, and chronic back pain that forced me into medical leave. In this succession of messes, I had one thing going for me: my investments were all still in tact and my portfolio was doing well.

During this extensive transition, I started to think about what I really wanted to do for the next phase of my life. I knew that I wanted to be my own boss and I entertained the idea of having my own business. I had the great fortune of meeting an awesome guy, JP, who eventually became my forever man. He too shared an interest in becoming some kind of entrepreneur. Inspired by the new prospect of becoming bar owners, we took courses in business. With my new ambitions, I wanted people to take me seriously. Then I realized I had to take me seriously. I shopped less frequently, but I was still being ridiculous with my money. So I vowed to not shop for clothes, bags, or shoes–not even socks or undies–for a year. In my old life, I had lived simply on much less for so long, that I knew I could do it. My rules still allowed me to receive unsolicited clothing gifts, I just couldn’t buy anything for myself.

Here are some unexpected things that happened the year I didn’t shop:

  • I worked out at the gym more and healed my back
  • I further downsized my wardrobe and belongings
  • Friends who knew about my vow were inspired to downsize too. They gave me their unwanted clothes–next thing you know, we were all clothes-swapping with each other
  • More money in, much less money out
  • I managed to go down to working part-time so that I could focus on learning more about investing and trading stocks
  • At the end of the year, I decided to continue with my vow for another four and a half months (507 days in total) until alas, all my clothing essentials morphed into shapeless mesh
  • I quit my job and had a great semi-retirement party
  • Untethered by work and other obligations, my man and I started to think about moving eastward to a better time zone to trade stocks at a more decent hour

It has been six years since my shopping fast ended. Those urges to shop still come and go, but I can observe these impulses with distance and objectivity. I still have plenty of clothes, but what’s most important is that I’m very content living with what I have. I only get things as I need to or when I really want to, which is a couple of times a year. Now, when I’m in a store I think about how the business is run, how much foot traffic it gets, how they display, price, and merchandise, how well it’s managed, and how happy the employees are. And of course, I exercise my new habit: I check if the store’s company trades on the stock exchanges, and if so, I look up the ticker symbol, the stock price, and how it performs against other retailers in the same sector.