Stocks to Avoid: Beware the Next Something
In One Up on Wall Street, there’s a chapter dedicated to six types of Stocks to Avoid. One of them is “Beware the Next Something.” I have a great (horrible) story of my own about buying into “The Next Something.”
Rags to Riches
In 1996, Diamond Fields Resources was sold for $3.1 billion by its owner Robert Friedland. A few years earlier it was promoting a long-shot diamond mine in Namibia. Then Friedland got lucky when a couple of prospectors in Newfoundland found the largest nickel deposit ever and turned to him for help.
The story of Diamond Fields can be read in detail in The Big Score by Jacquie McNish. It’s a good story but it’s not the one I want to tell.
The Next Diamond Fields Resources
Similarly in 2007, a small prospecting company called Noront Resources found what was supposed to be the next Diamond Fields Resources. What’s now called the Ring of Fire is a massive deposit of nickel deep in the northern region of Ontario. Noront went from an unknown penny stock trading at $0.30/share to over $6.00/share in a few months.
Like a lot of people I jumped on the stock before knowing much about it or what’s required to start a mining operation in the middle of nowhere Ontario. In case the answer is not obvious, it’s a lot of money. So much so that Noront’s share price returned from orbiting the stratosphere back to penny stock status.
I believed that Noront was going to be the next Diamond Fields. It was not. I lost money.
Child World?? Never Heard of It!
Lynch discusses a company called Child World in One Up on Wall Street. It was supposed to be the next Toys ‘R Us. Never heard of Child World? You’re not alone. This is why “Beware the Next Something” stocks are to be avoided.
Anyways, I hope these anecdotes are helpful. Experience has taught me to heed Lynch’s warning of Stocks to Avoid. In my next post I’ll chat a little more about that chapter in One Up on Wall Street as well as talk about a few other subjects like a book I just finished by Annie Duke called Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.