Proof vs Potential

“How many can you get me?” he asked quickly

It’s 1995. I’m a young stockbroker working at Commsec and the client on the end of the phone is a charter pilot from Western Australia.

His clients are all mining executives who he charters around remote locations looking at gold mines, oil wells, gas deposits, plus anything else with massive upside potential.

Consequently, he gets lots of ‘hot tips’ about mining stocks.

Hence the reason his voice is laced with excitement and secrecy when he calls me.

He’s just spent three days in the air with the CEO of Anzoil, a junior oil stock headquartered out of Perth.

And the good oil is, Anzoil is about to make a discovery that could send it’s share price from 16 cents to north of $1 in a few weeks.

If that happens, it will be a return of 600% plus!!

And so he loads up and buys as many shares as possible at 16 cents.

And then a few weeks later it looks like he’s struck oil because it’s now trading at 30 cents.

But he doesn’t sell because Anzoil is ‘tipped’ to reach $1.00.

He holds on.

And then about six months later it’s trading at 2 cents, and he’s done his dough.

So, what happened?

Put simply, he bought a plane load of ‘potential’.

There’s a big difference between proof and potential.

Proof is low risk because it’s a known quantity. E.g. buying blue-chips shares like Woolworths or CBA.

Potential is high risk because it’s an unknown. E.g. mining or healthcare stocks.

The problem with buying potential is investors risk paying a lot more for an asset than what’s it worth. Which is exactly what the pilot did.

He paid 16 cents for a stock worth 2 cents, hoping like hell it would go higher.

But hope is not strategy.

Now you might be thinking, “What fool would do that. Serves him right!”

Trust me, there are heaps of pilots in this market right now.

For the past eighteen months, investors have been piling into AI stocks sending them to stratospheric heights.

They’ve been paying massive premiums for ‘potential’ based on what AI could do, not what it has done (proof).

Consequently, the stock market is now the second most expensive market in history. [1]

Earlier this week the stock market looked like a blood bath due to some bleak looking employment numbers suggesting a recession is pending.

And then by the end of the week the market sell-off looked more like a cold shower after a small recovery.

There will be plenty more sell-offs over the coming months similar to what we saw this week, especially in the AI sector.

And it will be for one reason only…investors have spent the last couple of years buying potential instead of proof.

And when the sell-off’s start again, it will feel like the plane is falling out of the sky.

Have a great weekend!

Adam

[1] According to the Shiller price/earnings ratio.

Back paddock – did you hear Arisa Trew, the skateboarder who became the youngest Aussie gold medallist at age fourteen.

When the reporter asked “what’s next” she said…

“Well…I’ve always wanted a per duck…and Mum and Dad promised that if I won a gold medal, I could get a pet duck…so I’m getting a pet duck!”

I reckon she spent more time talking about her pet duck than the gold medal.

So cute!