Are You Being Misled?
The Dynamic Wealth Report
April 19, 2010
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.
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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.
• Automobile Industry (Up 33%)
So far this year, the top performing industry is automobiles. The entire
sector is rebounding and moving higher. Companies like Ford (F) and
Harley Davidson (HOG) are leading the industry. As consumer spending
accelerates, these businesses should perform even better.
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