A few weeks ago we said you shouldn’t be afraid to trust other people with your money. But what about trusting other people’s investment advice?
When you put your money into a mutual fund and trust somebody else to manage it, your assumption is that the person in charge will be an expert in their field (investing). However, many of us get stock advice comes from friends, neighbors, or the occasional dental school student at Kevin’s favorite bar; hardly experts.
So what do you do when a good friend presents you with the “investment opportunity of a lifetime”.
If you invest in whatever company they recommend, you may be on the hook for a significant loss. However, if you don’t invest, you may lose out on great returns and have to face the “I told you so” routine on a daily basis. Clearly you can see the dilemma.
Keep a Little Bit of “Play Money”
I could never with a clean conscience recommend that you blindly follow the advice of an investing novice (including myself) when it comes to your savings and retirement. Obviously you should do your own research and make your own decisions. If you want to take some big risks in the hopes of some crazy gains, make yourself a stash of play money. Every month put a small percentage aside that you are willing to lose without losing sleep.
You can then use this money to follow the investing advice of a friend, acquaintance or internet blogger without getting emotionally attached to the outcome.
ADDvantage Technologies (NYSE: AEY)
One of my favorite reads is the MOSinvestor. His blog is usually very technical and may be a little hard to read for a beginner, but a few weeks ago I saw a great piece of investing advice.
The blog makes a strong argument for the valuation of ADDvantage Technologies after a particularly disappointing quarter and a 15% drop in share price. You’ll notice some things in this post that should have warning bells blaring in your head. The company only having a market cap of $24 million and competing in what should be a low margin commodity industry are just a few of the reasons to move on.
However, despite these red flags that tell an ordinary investor not to waste their money, the MOSinvestor makes a good case for AEY. The most compelling reasons being that they are a profitable company with very limited downside due to having total assets nearly double their current market cap and minimal liabilities.
So what do you do? Clearly you don’t want to wager your retirement on such a risky investment. If you’re looking for a safe investment in a retirement account, you peace out. But if you’re looking to take a chance on making a big profit with some play money, you’ve found the right stock.
Word of Caution
Make sure you keep your play money separate from your other funds and stay very disciplined in keeping it a small percentage of your total portfolio. It is very easy to let this excessive risk spill over into the rest of your investing activities which can be incredible dangerous.
To make sure your play money doesn’t mix with your real money, I would recommend opening a new brokerage account (there are plenty with no annual fee). When you calculate your net worth or calculate your future retirement, assume the value of this account is zero.
I currently do not have a position in this stock and do not plan to do so for the next 90 days.
I’m on board 100% with The Hoff’s opinion of this stock. It looks like a great company if you are willing to take on a lot of risk with a small amount of money. The fact that they have $34 million in shareholders’ equity with a market cap of $25 million tells me that there is a lot of upside to this stock, so if I had more money to invest I might take a chance here. Maybe I need to ask for a raise.
Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.