Are You Being Misled?

| April 19, 2010 | 0 Comments

I’m standing in a dusty parking lot holding an orange sheet of paper with a number printed on it.  Little kids are running around and the adults are focused on a tall man along the fence.  He’s wearing a huge white cowboy hat and yelling into a loudspeaker.

The local gardening center went belly up- and we were at the auction.

At one time, this operation was rated one of the top nurseries for desert plants.  Its 12 acres of nothing but cactus, desert trees, and succulents… everything from the exotic to the mundane.  Don’t forget the gardening equipment and landscaping products.

If it wasn’t nailed down, they were selling it.

I’d stumbled across the auction purely by chance.  Since we were working on the backyard, I thought it might be a great opportunity to pick up some stuff at fire sale prices.

I was fascinated.  I watched closely at how the auction was being run.

The auction was clearly for the experienced buyer.  Many of the lots included over 100 of the same cactus.  All in pots, ready to be sold.  A perfect opportunity for another nursery… but not for the home gardener.

Inexperienced buyers started wondering what to do.

Sensing the angst, the auctioneer in the cowboy hat offered a solution. “Buy the lot and take what you want.”  Anything left would be hauled away when they cleaned up the property.

That’s when I noticed a younger looking guy making his way through the crowd.

He was polite and oozed self confidence.

He slicked back his black hair and held his clipboard firmly.  His commentary was the same.  Don’t want to buy 100 of the same cactus? Don’t worry, I’m going to buy them.  Then I’ll call you and sell you a smaller group.  What a deal.

People were writing down their phone numbers on any scrap of paper they could find.  I did it too.

Then I realized what he was doing.

He was eliminating bidders.  He was working the crowd, getting rid of the competition without them even knowing.  If these other people didn’t bid, he could buy everything on the cheap… and he had no obligation to resell anything.

It was a sharp way to play the auction game.

Sure enough, about 20 people had agreed to buy stuff from him… and he went to town winning lot after lot of cactus and garden equipment.  The others watched and were excited when he won.  None of his “group” wanted to bid against him.

I jumped in and focused on what I wanted… I bought some of the smaller groupings.  Aloe plants, paddle cactus, Bougainvillea, and terracotta pots… lots of pots.  I spent just over $80 that day… and I bought more than $1,000 worth of stuff.  (One of the pots alone was marked for sale at $250.)

That’s more than a 1,150% return on my investment… and not a bad way to spend money.

I was happy with what I got… but I was wondering if the Slick Willie bidder in the black hair would ever call.  He never did.

I felt a twinge of sadness for all those people in his group.  People watched incredible bargains slip through their fingers.  They’d never again see cactus at such cheap prices.  They’d missed their opportunity.

I see investors being misled in the same way.

They make the mistake of believing everything the company CEO says. Just because the CEO says it doesn’t mean it’s guaranteed.

Management will issue press releases and talk at length on conference calls about a company’s new product.  They’ll highlight how great the future is… but it frequently doesn’t work out that way.

Just watch the CEO.  He’s like Slick Willy at the auction… “Trust me, everything will be great in the future.”  He’s always highlighting the positive.  He is the company cheerleader after all.  And that’s his job.

Often management will provide guidance to the street.  Guidance is a fancy word for “I just guessed at it.”  It’s useful in some instances, but in others, the guidance is way off.  Remember, the CEO will always be pointing out the upside and spin positively the downside.

As we go into earnings season, keep this story in mind… and remember to take everything the CEO says with a grain of salt.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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