Eddie Thompson looked on with astonishment as Lewis Sanchez tried but failed to hide his confusion. The question hung in the air awkwardly as Lewis’ eyes glazed over and he stared into nothingness. And it was in this moment that it became abundantly clear to Eddie that when it came to Lewis investing in shares, he had absolutely no idea what he had invested his $40,000 into…
Towards the end of last year, Lewis was at a mid-afternoon barbeque which had been organised by Mike, a friend of his, as a final get together before people headed off on Christmas holidays. With a beer in one hand and a half-eaten snag in the other, Lewis overheard a conversation about the best place to invest your money. He listened for a few minutes, which was unusual for Lewis as he was more accustomed to the sound of his own voice, but he wanted to finish eating his sausage while it was still hot before he imparted his words of wisdom to those around him.
With one last mouthful that saw him bite off more than he could chew, Lewis awkwardly swallowed the last of his food, and then interjected in his characteristic take no prisoners style. ‘You should forget about investing in blue-chip shares or property!’ he said, his eyes filled with the promise of expertise that he simply didn’t have. ‘Cryptocurrencies are where it’s all at these days, and Riot Blockchain is a first mover that’s poised to capitalise on this technological revolution,’ he added, his nostrils flaring wildly as he nodded his head in corroboration of his statement.
A cautionary tale warning against acting on armchair investment advice
Have you encountered a ‘Lewis Sanchez’ at some point in your life? It’s a common tale – a loudmouth, an abundance of confidence, a complete lack of understanding for the recommendations he is making and an equally profound misunderstanding of the audience he is imposing them upon. And for Lewis, the end of year BBQ at Mike’s place was almost like a moth to a flame. It was the perfect setting for him to take control of the conversation and rustle up some recognition for recent investments he’d made.
For Eddie Thompson, although he’d never met Lewis before, he knew that acting on something he didn’t understand could lead to trouble, which is a rule he applied to most things in his life, and especially when investing in shares. He just hoped the rest of Lewis’ audience shared the same reservations.
When it comes to investing in shares, Eddie quickly realised that Lewis paid no heed to what an asset is or how it works or why it’s valuable and he seemed to give little consideration to the risk of losing his own, or anyone else’s money for that matter.
Never invest in a business you cannot understand
Billionaire and legendary investor, Warren Buffet, once said: ‘Never invest in a business you cannot understand’.
Of course, this may mean that you miss some good opportunities along the way as is evidenced by the fact that Buffet himself passed on investing in both Amazon and Google in their early days because he couldn’t understand how they could produce a profitable and durable competitive advantage over their peers. However, despite such missed opportunities, it still pays to avoid those investments which you don’t understand as there will always be plenty of other opportunities to make good investments that you do understand and, in so doing, you’ll increase your chances of producing a positive return on your money.
More experience giving advice than investing in shares
If you’ve read the previous story about a huge share investment windfall made by Tommy Demarco and the detrimental impact on his personal wealth, then you’d have come across Lewis and been given an insight into the destructive influence that Lewis’ investment advice had on Tommy.
Going back to the BBQ, though, other than Mike who had organised the get together at his place, Eddie and the rest of the BBQ goers were only meeting Lewis for the first time. And after Lewis had interjected in his characteristic take no prisoners style with his Riot Blockchain recommendation, the five other participants in the conversation took a moment to collect their thoughts while they digested the finality of the declaration that had been laid out before them.
Investing in shares without adequate research
Unfortunately, for Lewis, his last mouthful of sausage wasn’t the only thing this afternoon where he had bitten off more than he could chew, as one of the five faces that now stared at him curiously belonged to, Eddie Thompson, a work colleague of Mike’s whom Lewis had seen around a couple of times before but never been formerly introduced. Unbeknownst to Lewis, Eddie was a well-informed individual and a software engineer specialising in systems integration, so he had a healthy understanding of cryptocurrencies and the application of blockchain technology in transactional processing.
‘I take it that you see blockchain technology changing the way that banks, businesses and pretty much everyone for that matter exchanges data?’ Eddie asked, his question hanging in the air with a degree of expectation. Lewis took a moment to gather himself, doing his best to hide the blank stare that would otherwise expose his ignorance.
Despite it being one half of the name of the company that he’d invested his money into, Lewis wasn’t entirely sure what blockchain technology was or why it was important. He was aware that it had something to do with the way data was stored or something of the sort, but that was as far as he’d looked into it. He knew he couldn’t admit that, though, so he tried to exude as much confidence about the subject matter as he could muster to avoid arousing any suspicions.
‘Yeah, it’s all about the blockchain,’ Lewis remarked. ‘That’s where it’s all at and that’s why Riot Blockchain is a goer! I’ve invested $40,000 and I’m expecting to double if not triple that in the next few months!’ he exclaimed, the forcefulness of his voice masking his ignorance of the subject matter.
‘I couldn’t agree more about blockchain,’ Eddie replied. ‘It’s definitely a game changer, but aren’t you a little bit concerned that cryptocurrencies have some serious challenges to overcome with respect to transactional processing times and costs, and not to mention a severe lack of regulation when it comes to potential data corruption which undermines the intrinsic value of the coins themselves?’
Lewis couldn’t hide the blank expression on his face this time as his eyes glazed over and he gazed into nothingness.
The situation became increasingly awkward as Eddie’s question was met with nothing but a long, protracted silence. Lewis tried to save some face by looking pensive, but that would only buy him a few seconds.
The problem was that he had no idea what Eddie was talking about and he knew he had to bring the discussion back on his own terms. ‘Look, mate . . .’ Lewis said, pausing momentarily as he searched for the right words to refocus the conversation. ‘You’re worrying too much about stuff that doesn’t matter. The point is that Riot Blockchain is the right company to invest in shares because it is experiencing far greater returns for investors than almost any other share on the market . . .’
Past performance is no guarantee of future results
Eddie and the others listened on for another half-an-hour as Lewis recounted tales of countless other successful investments Lewis had made and the astronomical returns that Bitcoin and other cryptocurrencies had experienced since 2010. ‘Turning people into millionaires overnight!’ he emphasised time and time again.
There was no substance behind anything that he said. No rationale for recommending the investment other than a hunch . . . a huge jump in Riot Blockchain’s share price and the euphoric belief that the stock would continue to climb.
It quickly became evident to those listening to Lewis that he had no legitimate reason for investing his $40,000 other than the fear of missing out.
Eddie was too polite to call Lewis out on his ignorance, but he did quietly mention to Mike before he left the BBQ later in the evening that it might be a good to get a second opinion on any investment advice that came from Lewis. ‘Don’t worry,’ Mike said. ‘We don’t call him Loudmouth Lewis for nothing,’ he chuckled.
Unfortunately, for Lewis, no less than a month after his BBQ ramblings, the price of Riot Blockchain dropped dramatically, and he was forced to close his position at a significant loss. While Lewis is obviously a caricature of irrational exuberance, he serves as an important reminder to us all that the lure of easy money can shroud our better judgment.
If the only reason you’re investing in something is because you think it will go up in value, and you have no real understanding of what it is or why it’s supposedly valuable, then you’re not really investing at all. You’re speculating. Plain and simple. Adrian McPhee – Financial Advisor
FOMO is not an investment strategy
When a Fear Of Missing Out (FOMO) is the reason you are investing in shares (or any other investment), you’re probably going to lose out! Worse still, if you are relying on recommendations from exuberant BBQ goers without performing your own due diligence, it’s unlikely that you will follow in the footsteps of others who have backed a winner in its infancy and made a fortune.
While it’s important for people of all ages and financial capacities to have a diversified investment portfolio to help secure their financial future, getting the right investment advice before investing in shares or establishing an investment portfolio is crucial.
Sticking to what you know and understand or broadening your knowledge and learning about appropriate investment strategies before investing can help you to avoid a very expensive mistake. Otherwise, it will probably only be a matter of time before you too end up like ‘Loudmouth Lewis’ and have a nasty cryptocurrency hangover to nurse well after the music stops playing.
Want to discuss strategies for investing in shares with a Financial Advisor?
Click Here to book a time to spend an hour with a Financial Advisor. Ask questions, review your current financial situation and discuss available options for investing and achieving your financial goals.
