When You’re in a Risky Investment, Take the Short Money

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I was once involved in a public company that had, as part of its asset base, shares in a gold mining company. Since I didn’t know anything about mining, I’d been urging the company to sell its mining holdings for cash and use the proceeds to develop an internet marketing business, something I understood a little better and had more faith in.

Soon after I started arguing that we should get out of it, our mining company got very positive results on some prospecting it was doing. The inside word was if we shut up and held on to our shares, we’d get rich.

Did I shut up?

On the contrary, I argued more strongly than ever that we should sell out. Now that there was good news, perhaps we’d get good money for our stock.

As far as I’m concerned, I’d rather have my cash invested in a modestly good investment I understand than an extraordinary one I know nothing about.

I’ve made this point before. Invest in what you know. And whom you know. But if you should get yourself into a situation like the one I just described – where you have money in a speculative business you know little about – look for the first chance to get your cash out. And when it comes, take it. Don’t even think about what you could be missing.

If I Had a Nickel for Every Sure Thing…

When it comes to investing, there are two kinds of opportunities I stay away from: long shots and pot shots.

Long shots are speculative investments. Mining, by its very nature, is speculative. So is digging for oil.

Pot shots are investments in businesses that may be sound, but about which you know little or nothing.

Combine the two – pot shots and long shots – and you have a sure shot to disaster.

I can’t think of a single financial long shot or pot shot that has ever worked out for me. I can, however, tell you about a few I narrowly escaped.

Like the time my business partner and I owned rights to some cellphone lotteries when the government was auctioning off cellphone sites. To raise money, all kinds of limited partnerships were set up to buy auction entries. You bought the entries and then, if you were lucky enough to be picked, you were instantly rich. At least that was the sales pitch.

We got good news. Our tickets were on the short list. The broker who sold them to us called to tell us the good news. The $10,000 we had invested would soon be worth a million bucks.

“I’ll take a hundred grand in cash right now,” my partner said.

“You’re not serious,” the broker stammered.

“Dead serious,” was my partner’s reply. Sensing I should comply with my more experienced partner, I agreed.

The broker assured us we were crazy. We persisted. He hemmed and hawed and finally admitted he wasn’t sure if he could get a hundred grand for our shares.

“Then we’ll take 50,” my partner countered, cool as ice.

When all was said and done, my partner and I had 50 grand to split between us. Everyone else I know who was involved was left with nothing.

I Don’t Like Speculative Deals – and Am Always Happy to Take the Short Money

Yes, there are plenty of stories out there about people who got rich off pot shot and long shot deals. And some of them are true. You may even know someone who made a fortune by blind investing in some startup venture just because it sounded good.

If you listen to such stories, you will almost certainly talk yourself into a speculative investment one day.

My advice: Don’t do it. For every person who’s gotten rich blindly, there are a hundred who have acquired wealth the traditional way – with their eyes open and focused on business.

So if you do find yourself knee-deep in a speculative investment that you don’t understand and you have a chance to get out… take it.

Good investing,

Mark

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