Probably the most difficult question in the financial world is, “How do you go about making good investments?” Unfortunately, there are no simple, easy answers. The only way to get the right answer is to either become an expert yourself or hire someone from the field in which you wish to invest.
Should you decide to select an investment expert, make sure you know a lot about them. How are they compensated? Learn how long they have been doing what they do. Look at the actual records of accomplishment of the past investments they have made and see how much they actually paid back to their investors, net of their fees. The longer the track record this adviser has, the better. Do not be fooled into accepting projections of what past programs should do with the sale based on today’s values as a substitute. Finally, ask for many referrals and take the time to check them out.
Once a wealthy Texas oilman was overheard in a conversation with a friend at the petroleum club in which the friend asked, “Jack, have you ever had that once-in-a-lifetime oil prospect where you knew it was a sure thing? You know, where the oil was kind of standing in puddles on the ground and you knew you had a winner?”
“Yep!” answered the oilman, “I’ve seen one or two of those from time to time.”
“What did you do with those types of deals?” asked the friend. “Well,” came the reply, “I have some good friends on Wall Street who have been kind of special to me over the years, and I usually give them a call and let them put up the money and we split the profits.”
“Jack, what about the kind of deal where everything looks good, like the engineering, seismic reports and all? You know the kind of the deal you feel is almost certain to hit?” asked the friend.
“In those cases I usually call my personal banker over here in town. He’s been real good to me, and as a favor I let him put up the money, and we drill the property and split the proceeds,” answered the oilman.
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The friend said, “Do you ever have a property where the lease is going to expire in a month or two, where the engineering’s not too hot, but you have a rig sitting idle nearby?” The oilman just laughed and said, “Yeah, all the time.”
“What do you do with them?” asked the friend. “Oh,” said the oilman, “I get a bunch of doctors and lawyers who like to say they’re my buddy. I just give them a call and let them put up the money. If we find anything, we split the deal.”
There is a lot of truth in this story. Just choosing a wealthy, successful person with whom to invest is not good enough. Look at their track-record very carefully and see how all of their investors have done over the years. The same is doubly true concerning major investment firms.
Investing is a science, and each investment field is unique unto itself. Becoming an expert in one field does not make you an expert in another. There is absolutely no relationship between having the knowledge to selecting a good oil investment verses analyzing a good stock.
Remember that investing is a science. The more you learn, the more risk you can remove as you learn to ask the right questions. Rarely does someone get rich by accident. In addition, in the rare occasion when that does happen, that someone usually loses it all through bad investments he makes after that. Do not blindly play your instincts based on knowledge from another field. That is the surest way to lose there is.