#inside knowledge

Characters from my eventual shounen series. 

In order left to right:

Recently, I was drawn attention to an article by Martin Armstrong from 2012 titled The Analytical Shill.

This excellent piece explains the rotten system of investment “analysis” and “advice” given out by most “experts”.

It’s easier said than done, even for seasoned investors.

Many investments exhibit a hype period… the dot.com bubble, the real estate bubble, the mining bubble, the Facebook hype, etc.

Many of these burst bubbles will recover (some sooner, some later), but others will remain suppressed indefinitely (e.g. Japanese stocks).

Regardless, one of the lures of inside investing is the promise of buying-in prior to the hype phase, and thereby being able to capitalize on the rapid rise.

Unfortunately, this is also one of the potential pitfalls. The lure can be seductive enough to blind us to the fact that the bubble has already reached bursting point.

Case in point… some time ago I acquired stock in a promising technology startup. It did very well, gaining over 40% in a matter of months.

This type of growth caught my attention. Obviously I was pleased that I’d had such an extraordinary capital growth in such a short period.

But, in the back of my mind was the nagging thought that this type of hyperbolic growth smelt like a bubble. My logical brain said “now could be a good time to sell”, but my emotional brain said, “wow, what a winner, in a year’s time I will have doubled my money.”

Note: This type of internal battle can be resolved through the use trading tools such as sell stops. For a quick example of why you would want to do this, take a look at the Optimism and the Stop Loss on the Rich Dad Stock Blog.

Unfortunately, on this occasion, my emotional brain won the debate, the bubble burst, and the stock dropped.

It’s not all bad news, however. The technology is still extraordinary, the company is still growing and is profitable, so we begin the next phase of solid realistic growth.

For those who had not already bought into this opportunity, now is probably the best time to get in — at the beginning of the post-hype growth, where the growth will be steady, measured and far more predictable than the initial excitement hype.

Time and time again the same type of boom, bust, growth story plays out. If you want to see it in action right now, take the time to watch the following video from Casey Research about the exciting technology opportunities that have now reached this measured growth phase.

Obviously, if you can time the start and end of the hype phase you can make an extraordinary return in a very short space of time.

The problem is, by the time most of us identify that a hype is taking place it’s probably time to get out. Catch-22.

Some recent experiences have reinforced for me the importance of being an insider.

Not only is it important for fruitful investing, it is also key to a successful professional career.

For example, you are far more likely to get awarded contracts, or get offered an exciting job, if you are already known and respected by the client. Even in circumstances where a competitor may have a slightly stronger proposition.

If you are on the inside you are likely to be the first to be offered lucrative business opportunities.

The reason is that clients prefer to deal with people that they have previously had successful dealings with. They would rather continue doing business with someone who has demonstrated that they can successfully deliver.

This lowers the risks of the business relationship, lowers the transaction cost (the client doesn't have to re-train a new provider), and increases the chances of a successful outcome.

It's the same with investing. Great opportunities are likely to be offered to insiders before others.

Good insiders have previously demonstrated the value that they can bring to an investment (market knowledge, experience in growing investments, valuable contacts, etc).

Many of the best inside investors who are active on the internet will publish their own regular email newsletter or report.

These newsletters take many different forms, and are designed to deliver all sorts of different information.

Some of them will provide ongoing analysis and commentary on individual investment opportunities, others will deliver broad sector outlooks, and some will offer a big picture global perspective.

Almost all of these newsletters will require subscription payment (usually several hundred dollars per year), and can offer great value for money, especially if you subscribe to newsletters that align with your own particular investing strategy.

Many of the providers also offer free newsletters. Some of these offer one or two tidbits per edition, others will be abbreviated versions of the full newsletters, and others will be a separate service that complements the services of the insider.

These free newsletters can be a great way to test the relevance of the information provided by individual insiders.

I find it instructive to follow such newsletters (either free or paid variants) for several months (sometimes years) before acting on any information they provide.

This strategy enables me to evaluate the worth of the information, and the insider’s credentials, based on whether their insights actually deliver fruit in the market.

It’s easy enough to subscribe to these newsletters. Usually it’s simply a case of putting your email address onto a website. If payment is required, it is almost always done via credit card (or increasingly via secure intermediate payment services such as PayPal, which gives you an added layer of protection as your payment will not be going directly to a provider that you may not yet trust).

A brief word of caution with regards to such insider newsletters. A number of them are prepared for the purpose of making money for the insider.

One strategy is for the insider to talk up a stock that they already own, with the knowledge that their readers will then buy the stock and hence inflate its price.

This will deliver a short-term gain to the insider. Note that this is not necessarily a bad thing at all. I know of a number of newsletters designed to do this. I also know many of the investment recommendations are actually good picks. Hence the readers will often also make a gain.

The point is that you should always be mindful of the motivations behind the insider's reports. Once you understand this, you can then make more appropriate decisions for yourself.

The good insiders, however, will disclose their positions when writing their analysis, and also indicate with several days advance notice their intentions for their own investment.

Having said this, however, there are obviously going to be newsletters whose sole purpose is to rip-off the readers. A good example are the so-called “penny stock” reports.

These purport to reveal amazing stocks going super cheap (a few cents per share). Of course, most of these are usually highly speculative (e.g. some types of mineral exploration).

As the readers buy into these penny stocks, and inflate the price, the insider will dump their holding having made an easy profit, and leaving the readers holding a potentially over-priced asset.

Unfortunately, a number of real estate reports are similar. Reports offered by some real estate analysis firms, banks, real estate agencies and developer groups are often motivated to talk up the market, and hence do not offer the objective information that is required for an investor like you or I.

I’ve previously given you a few tips on how to narrow your investing focus and also given you a few ideas on how to determine what topics might suit your investment strategy.

To bring this all together, below are a series of questions that can help you discover your own inside track for investing, and hence bring out your very own unique investing mojo.

What do you know a lot about?

What expertise do you have? Can you use this as a starting point to learn about the investment possibilities in your field?

Perhaps it’s your profession, or your hobby. For me, I have expertise in the sciences, access to information about new scientific discoveries, and the skills to examine and understand the technical details of such discoveries.

Whilst new discoveries rarely present immediate investment opportunities, they can offer some insight into future technologies and social changes. So I use this expertise to both find and consider opportunities.

For example, in a scientific journal some years ago I read about an old food processing technology that had been reborn due to new equipment that could make the technology economically viable. This technology has the potential to vastly improve the quality of our processed foods, and at the same time increase their shelf lives and hence reduce food wastage.

It caught my attention. At the time I vowed that if a business closer to home ever sought investors then I would most definitely consider investing.

Approximately five years later, a local company did begin operations, and was looking for private equity to fund their national expansion. The management of the company checked out, the numbers made sense, and there were already a number of well-regarded high net-worth individuals on-board.

To this day this remains my favourite investment, and it is already turning a profit even though the company is still in its development phase and probably won’t see a meaningful return to shareholders for another couple of years.

What do you have a passion for?

What “wows” you? Is it new technology? Medical breakthroughs? Nice houses? Solving problems?

My particular passion is for what is known as ‘disruptive’ technologies, that is, new technologies or ways of doing things that can completely revolutionise society and business.

Examples from history include the production line in factories, fibre optics in communications, mortgage-backed securities in finance, and the list goes on.

So, I tend to look to invest in such potential ideas, but am very particular. I only consider companies that have a compelling business plan and strong management. The above example is one such operation.

Who do you know?

Do you know anyone who is well-connected and knows a lot of credible goss’ or has years of wisdom and experience?

You can learn things from these people about the way of the world. I’m not talking about your co-worker who bought shares in a company only to have them double ‘overnight’… purely by chance.

I’m talking about your partners’ boss who used to work for an investment bank, or your uncle who sits on lots of government committees, or your best friend’s nephew who’s part of a group of tech-heads creating successful start-ups.

These people are all doing things in the world, are privy to the latest developments and trends that you probably won’t read about in your local or national newspaper, and they have knowledge, information and experience that you can learn a lot from.

As a good example, I have a few close friends who work within state and national governments. From time-to-time I speak with them about various economic statements made in the mass media, and they are often able to explain the basis for those statements (e.g. “Europe is headed for a second great depression”) or point out hidden facts that cast serious doubt on the statements (e.g. “the housing market remains strong”).

Why do you want to invest?

Is it just because you think you should? Or do you have specific lifestyle goals that you want to achieve?

I’ve noticed that goals such as “I want to make a million dollars” are not compelling reasons to invest. Such statements are not specific (other than the dollar amount), and almost always carry no emotional attachment to them.

However, if you want to live in a house in a particular neighbourhood, or start-up a charity, or own a collection of vintage cars, and you need a million dollars to do any one of these things, then you have a goal and a dollar figure to go with it – you have a specific reason to invest.

This helps keep you focussed and also keeps your personal radar looking for the types of investments that will help you get there.

Notice how I did not ask you if you have a good education, and can you do math and english. Despite the fact that I have an advanced university degree, that included some highly sophisticated mathematics, I found that it has taken me quite a long time to be able to understand financial numbers (such as profit and loss statements).