A MarketWatch story about the collapse of India Globalization Capital (IGCC), a blockchain pot stock, caught my eye yesterday. The article details many red flags. My favorite was that a distributor’s store locations in major cities around the world all showed maps of Central Park in NYC, and, “Its address is listed as Sesame Street.” It’ll be interesting to see what the stock does this morning.
Now, before we get on our high horses, shake our heads, and make tough-sounding comments about some investors getting what they deserve, it’s worth asking how many of us actually go and take pictures of the supposed place of business of a company?
Even I—whose business revolves around my “boots on the ground” due diligence trips—can’t say I always check on the addresses of subsidiary companies. The fact that I log more miles in my attempts to leave no stone unturned than anyone else I know in the business doesn’t mean I can’t miss something. No one’s infallible.
That said, there were plenty of warning signs that should have made investors suspicious, starting with the very notion of a construction equipment and commodities trading company suddenly becoming both a blockchain and a marijuana play. Jumping on any given “flavor of the day” bandwagon is dangerous enough. Jumping on two at once doubles the number of pins that can burst the bubble.
In other words, due diligence starts with the essential idea of an investment, long before we get to knocking on doors of local offices to see if they’re real.
An example closer to home immediately comes to mind. Just after launching The Independent Speculator in April, I wrote a “not so fast” article about plans to use blockchain to solve the so-called conflict mineral problem. The idea seemed more about catching an already aging flavor of the day wave than a sensible business idea. I can think of one related equity I was pitched hard on. I didn’t like the whole idea, so I stayed away. It’s fallen by 50% since then.
Did I know this would happen? Of course not—that’s then point I’m making. It wasn’t my boots on the ground that saved me: it was common sense applied to investing in bubbles to begin with.
It’s like a skating party on thin ice. Everyone has a grand old time, doubling their money as the market goes vertical—until the ice breaks.
Now, it’s possible to make money on such bubbles, if one gets in early, while the night is still young and the party has plenty of energy. But even so, it’s important to remember that the basis of speculation is hope that a “greater fool” will come and pay us more than we paid. That’s an entirely different thing from buying objectively undervalued assets and holding for a revaluation.
It’s the difference between gambling with play money and making a rational speculation based on actual value.
And the critical thing to remember when “investment gambling” is not to bet the farm, as the president of OptionSellers.com, another recent collapsed company, did.
My favorite quote from that story: “I truly invested your funds like you were family … I’m sorry that this rogue wave capsized our boat.”
I’ve got to call BS on that one. The basic idea of options is to minimize risk to capital by buying or selling the right—but not the obligation—to execute certain trades in the future. It wasn’t a rogue wave that sank the ship here, but overconfident management betting the farm—and betting wrong.
Key takeaways:
- Beware of bubbles.
- If you’re not sure you’re in early, stay out.
- Always remember the difference between gambling and speculation.
- Only gamble with money you can laugh off losing.
- Never bet the farm.
- Crazy gains in hot investment sectors do not suspend the need for due diligence.
- Due diligence starts with the essential business idea, not just the important details.
Hence my favorite mottos: diligentia praemio (diligence pays), and caveat emptor (buyer beware).
