Don Steinmann's Investment Tip of the Week

Don Steinmann's
Investment Tip of the Week

If it Sounds too Good to be True it Probably is, but Not Always

Economists believe that markets are very efficient. If there is special deal to be had, the market will take it away immediately. That leads to the old joke about an economist who sees a $20 bill lying on the ground and walks on by. He knows that if there was a $20 bill there, someone would have already picked it up, so it can’t actually be there.

Usually, if there is an extraordinary deal when it comes to finance and investing, there is a catch. I had one a few days ago. I came across the bond of a company that was financially very sound, with a 5% one year yield. In today’s market that is a really high yield. But the broker I was dealing with assured me that the bonds really were available. I was excited to find a deal like that. Until the broker called me back to tell me it was a mistake and no such bonds were available.

Occasionally though, there really is a special deal that comes up. I’ve seen maybe six of them in my 20+ year career in portfolio management. It doesn’t happen often, but it does happen. Here are my rules about how to evaluate the ‘deal of a lifetime’.

  1. First, you have to overcome the greed factor. When someone says “Free money” (or close to it) we tend to let our emotions overcome our reason. Ask someone who isn’t going to benefit from the windfall what they think about it. A cooler head may keep you from being fooled.
  2. If the deal comes and finds you, forget it. No one is going to call you up to offer you an extraordinary bargain. They’d take it themselves.
  3. Look at why that deal is available to you. What’s special about your situation that this windfall lands in your lap? If you can’t think of a reason, pass it by.
  4. Deal with the time pressure. Usually a deal like that won’t last long. You have to make a quick, logical, smart decision. Don’t let the time pressure get to you though. Better you pass it by than make a decision you’ll regret.

I hope that you really do have a financial windfall opportunity or two in your life.

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