What is the Point?

On Friday a friend called me and asked me if I could do him a favour and give him my professional view on a new IPO that his company is looking at. He has very little clue about financial investments and wanted to speak to his boss after doing some behind the scenes homework.

I took a quick look at the details and was in principle very comfortable with the offering, it seemed to tick all the boxes, at least all but one in my book. However, when I finished writing up the report it dawned on me that my advice was contingent on a lot more information. To tell someone that the investment opportunity ticks the boxes, doesn’t tell you anything about how big an investment you would recommend or what a suitable time frame for the investment should be.

I realised very quickly this is the worst kind of friendly advice I like to give, what is the point? If you don’t tell me why you or your company is considering the investment or from what pot of capital is the allocation coming from of what value is this isolated advice? If for instance my friend told me, the investment is coming from a 5% speculative pool that has a very high expected growth expectation attached, then I could say straight away that although the intrinsic qualities of the offering are suitable, the actual place for the investment in your allocation pool is a mismatch or some such wholesome advice.

On reflection my friend could be saying to me that he doesn’t really want my expertise on asset allocation, rather he just wants my stock specific advice. In this case then a simple advice that it ticks the boxes could suffice.

However, I believe my friend himself hasn’t thought of it from this perspective. Rather the vast majority of people see investments in isolation and do not yet grasp the broader more important information of where and how this investment impacts an existing portfolio. This is not a criticism it is more an insight as we tend to compartmentalize our investments and projects of interest, often to the detriment of how it will stick together and its impact on the whole.

To conclude with an example, placing a large portion of ones total capital in a speculative offering can result in financial ruin, or an extremely small allocation to a low risk offering might have negligible impact. Context is key in the way we live our life on both a financial, spiritual and psychological level.

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