“A good story is always more dazzling than a broken piece of truth.”

 – Diane Setterfield

When Considering Stock Investments, Don’t Trust the Stories 

Forty-five years ago, my partner came into my office, beaming with excitement.

“I know you don’t invest in stocks,” he said. “But let me tell you a story…”

Along with about a dozen other investment newsletter publishers and financial journalists, he had been invited down to some Latin American country – it might have been Costa Rica – to inspect a new technology. It was a mineral-processing machine, one that was able to extract gold dust from volcanic ash.

He was skeptical at first, he told me, but when he saw the machine operating with his own eyes, he immediately invested in the company that owned it.

First, he said, they listened to a presentation by a geologist who provided proof that there was gold content in the ash and explained how the extraction worked. Someone else, a professor of geology, provided a short history of past efforts to reclaim gold from sand and explained how this was different. And finally, they were taken to the site where it was all taking place, a fenced-off area near the ocean where the extractor had been installed. At one end of the machine, local workers were shoveling in volcanic-rich sand. At the other end, gold dust was being excreted. And if that wasn’t proof enough, an independent geologist was there to confirm the quality of the gold.

He could see from the expression on my face that I wasn’t buying it.

“Hey. I told you,” he said. “I saw it with my own eyes!”

“I’ll send you the reports,” he said, and stomped out of the room.

There is nothing that inspires us more than a good story. My partner’s disappointment with my reaction was an understandable response to his conviction. He had heard a story, one that seemed implausible, traveled all the way to Central America to check it out, and had concluded that it was legit. It was a bonanza! And I couldn’t see it! He was already counting the money he was going to make by investing in it. And he wanted me to be excited, too.

Despite my reluctance, he brought the story to a half-dozen investment writers that worked for us at the time. Some of them, like me, didn’t believe it. But some did. And one of them wrote about it in one of our publications. A few months later, the story was in the mainstream press. But not as a big discovery. It turned out to be a complete fraud.

The fraud was uncovered by a competitor of ours, a publisher who had also been invited down to witness the amazing machine… but he happened to be fluent in Spanish. And, as  he told me later, when he asked one of the workers how many hours a day he worked, the man said, “Oh, we only do this when the Gringos come into town.”

“Why didn’t you say something?” I asked him.

“Your partner really went for it,” he explained. “I didn’t want to hurt his feelings.”

Stories sell. The brokerage industry understands that. And that’s why, when you get a call from your typical stock broker, he will gloss over the facts in order to give you a full account of the story behind the stock.

There are actually three very common stories that stock promoters tell:

* The revolutionary technology: It might be a new kind of microchip or a cure for cancer. Stories about world-changing innovations are intrinsically compelling. Written well, they have the emotional impact of a good movie.

 * The soon-to-be-signed contract: Nothing great is going on with the company now, but they are about to make a deal with some huge, usually undisclosed, partner that will send their sales soaring… and, thus, the price of the stock.

 * The legend does it again: The company’s president or founder was “behind” one of the biggest growth stocks in the last 10 years. Now he is turning his attention to a new business that nobody knows about but you.

As a marketing advisor to the investment publishing industry for nearly 40 years, I know the power that such stories can have. My clients use stories to sell investment publications, and stockbrokers use them to sell stocks.

When you buy a financial magazine or newsletter that disappoints you, you can always get your money back. (At least you can with my clients.) But if you buy a stock based on a story and you don’t like it, you are stuck with what could be a very bad investment.

Stories are compelling, but know this: There is no correlation between the quality of a story and the quality of the investment it represents.

And that’s why, when it comes to investing, you should take a very skeptical view of stories. Rather than be swept away by a good story, ask questions – lots of questions – and buy in only based on the facts.