Back in 1987 a lot of Moose Jaw investors had put their savings into a local branch of Principal Trust.
Principal Trust, a fast-growing national chain of branches was offering six per cent interest on savings, compared with five at other financial institutions.
That was the year Principal Trust had the rug pulled out by regulators for insolvency.
Four years later 67,000 investors got 90 per cent of their $468 million back. But they lost interest on the money for that period.
The Principal Trust situation involves a mistake many investors make. They don’t understand the concept of risk and often lose their proverbial shirts.
Understanding risk is the first lesson investors should learn before buying any investments.
Often the only understanding investors have of risk is: the bigger the risk the bigger the reward.
That is true but a better understanding of risk can avoid a lot of financial losses and grief.
Investors in Principal Trust should have asked themselves how the new smaller company could offer much higher interest than the larger banks and why didn’t the banks match it?
Sometimes just asking if the investment prospects are too good to be true will resolve the matter.
One of the main tenets of investing is do not lose money, or as little as possible. Some losses are normal in stocks and bonds.
Some basic questions to investment advisers or personal research can determine if an investment’s risk is uncomfortable.
One way of assessing risk involves questions about the company whose stock or bonds are in your sights.
What stage of development is the company at?
Mature companies generally offer slower share price growth but pay dividends that provide cash while waiting for growth. They are usually more stable.
Growing companies are expanding markets and profits. One mistake, or economy burp, and growth plans could go astray. They are riskier.
More risky are evolving companies that have a product or services still being commercialized.
Until the market accepts the product and profits flow they are quite risky.
Companies in the concept stage are riskiest.
They involve the development of an idea not yet proven successful. They burn through lots of cash and sometimes never get to the commercial stage.
Investors should consider and balance the four stages of development with an emphasis on the least risky. Perhaps include one or two riskier ones just to generate interest.
Before taking the plunge on stocks or bonds look at whether the company has too much debt. If it pays dividends, are the payments a large or small portion of earnings?
Buy stuff that allows you to sleep at night.
Determine whether you are an investor, speculator or gambler.
An investor buys only what seems a sure thing, A speculator calculates the risk and potential rewards before investing
A gambler buys the story, hook line and sinker, like most of the investors did in Canada’s over served cannabis industry.
Yours Truly should take his own advice more often.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
