Investing vs. Gambling

Last week we met with one of our private clients who happens to be in the medical profession. She had been approached by an advisory group who was promoting an investment opportunity in "a privately held medical radioisotopes supplier and

oncology drug developer positioned at the core of a novel

and exciting development in the treatment of cancer" out of Germany.

Very exciting!

For me (and Paul), however, red flags popped up immediately!

After reading through all the material we came to the conclusion that you would at least need a PhD. in medical bio-physics to understand most of what was in the specific details. I actually have a daughter who has a Masters degree in medical bio-physics (another story for another day).

Then there was the very long list of risks involved (which at p.13 of 20, after all the positive stuff, they did get to):

"The Fund is subject to a variety of risk factors, including reliance on a limited number of suppliers of raw material (also see below “Supply Chain Risks”), limited number of suitable nuclear reactors for the processing of its core products (also see below “Supply Chain Risks”), the result of its clinical trial(s), the protection of its intellectual property, the development of competing technologies, execution of its growth strategy, reliance on key personnel and potential lack of liquidity events, as well as economic conditions, epidemiological condition, government regulations, market risks, acquisition risks, credit risks, uninsured losses, debt financing, foreign currency and interest rate risks and secured financing. An investment in X has higher risk that typically cannot be valued by normal fundamental criteria. An investment in X may result in material loss. There is no assurance that this investment will be successful and you should discuss the suitability of this investment for you with your own professional advisors. No advance tax ruling has been sought or obtained in respect of the Fund. Tax laws and the Canada Revenue Agency’s administrative policies and assessing practices may change over time, and it is possible that the Canada Revenue Agency may disagree with the tax positions adopted by the Fund from time to time."

Yikes!

We also know from experience that many of these early development situations require lots of new cash to continue through to the eventual (hopefully it gets there) point of driving positive cash flow back into the company.

We have seen many situations where a new company may have to raise more capital three, four or more times just to get them to the starting point. In the meantime your early investment continues to get watered down to the point where you just hope you can get some or part of your money back. But you have to wait because there is no liquidity.

You may get lucky, but the odds are pretty much like buying lottery tickets (each of these types of investments being equal to one lottery ticket): the more you buy, the better are your chances, but you may need fifty before you hit one.

That my friends, for most of us, is just pure rolling of the dice. If you have very deep pockets (or even some deep insight), you may one day cash in, but for those of us with just our retirement savings to work with and families dependent on us for the future, we have to take way less risk as we work toward our goals.

As Paul quite succinctly put to me after looking at this "opportunity" closely: "In summary, not in this universe, or the next, would I invest $20,000 (or even $2500) in something like this. I would rather donate the money to a charitable cause I believed in more than this."

Our goals. We need to keep sight of our goals.

Back to our medical professional client whose immediate goals are tied to providing a healthy and active home life for  her children with a decent education and then her eventual retirement as she winds down her career.

Blowing up in a get-rich-quick scheme would put a hefty dent in the progress toward her goals. Oh and by the way, the advisor selling this "opportunity" was going to get paid a cozy 5% up front for his troubles. "Up front" in the investment advice world means that once you, the buyer, are deemed suitable (for the risk), and sold on the deal, there is, at least in the Canadian investment industry, no fiduciary responsibility put on the advisor beyond the initial sale.

You are on your own. With all the risk.

Getting to your goals is not going to come from a quick and easy deal, it is going to come from a long process of patient saving and investing with the stewardship from those (like us at High Rock) that understand risk, understand your goals, create a disciplined strategy for getting to those goals, try to keep your costs as low as possible, provide regular reviews of your progress and have the legal fiduciary responsibility to ensure that you are protected along the way.

It takes a long-term perspective: our client in this case, has another 50 years or so to spend and survive on this planet  and she needs a long-term plan to take her to her goals.