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Buying wine, art and classic cars is spending your cash, not investing

There are rules in place which prevent many media commentators and journalists from tipping stocks. That’s why, we see so many ridiculous suggestions as to where we should invest our money.

On Twitter recently I have been critical of journalists who helpfully suggest that we spend any recently gained additional wealth on buying wine, art, coins, classic cars and other such nonsense in the name of “investing”. As far as I’m concerned, buying a classic car is spending your money (and possibly lots more with upkeep, maintenance, insurance and running costs), not “investing”.

These journalists and others have to delve deep in the bottom of the personal finance barrel of top tips to source these alternative “investment” tips because they’re not allowed take up their weekly 500 words telling us to invest in Apple, or Microsoft, or whatever the stock market flavour of the month is. Alternatively, the go-to tip for many of these journalists is to “buy gold”.  (Gold isn’t a regulated product like stock market shares, and I’ll come back to this gold buying nonsense sometime soon).

Market Abuse Directive

The Market Abuse (Directive 2003/6/EC) Regulations 2005, sets out what are known as accepted market practices for how organisations involved in the stock markets are expected to behave in order to prevent insider dealing and market manipulation (i.e. market abuses).

One effect of this directive is that it prevents pretty much anyone that isn’t employed by a regulated financial services firm from tipping stock market shares. So, someone working for one of the top stockbrokers can do so because they have the research capabilities of their organisation behind them.

However, given that Joe Journalist doesn’t have the same backing, he or she can’t just publish a stock market investing tip based on just a hunch or a tip.

Investing in Molycorp in May 2013 was not a good ideaDon’t always believe what you read in the papers

Here’s a perfect example of why we’re being protected in this way. For the purposes of this tale, assume we’re back some time around May 5th, 2013. This article snippet shows up in a popular Sunday newspaper.

On this day, our fearless journalist told us that Molycorp – a company where the share price had fallen in two years from €70USD to €6USD – was possibly about to experience a turn in their cycle (according to anonymous unnamed tipsters).

Wow! Imagine. Given that past performance must obviously be a guide here to future performance, I could have bought that stock back in 2013 for €6USD and surely it’ll get back up to the original €70USD very quickly. In fact, it’s more than 3 years now, so surely I’d be rich already based on that advice.

And even better, because of a “kind of volatility who knows where they will end up”, I should definitely stay away from Apple. It went from €700USD 6 months previous to that article and was now trading at a measily €575USD.

Molycorp is a rare earths producer. It operates in the Resources, Chemicals and Oxides, Magnetic Materials and Alloys and Rare Metals segments. Easy enough stuff to understand – surely the tipsters do.

Fair enough, because it’s in the papers, it must be true. Dear Mr. Stockbroker, I’ll have €10,000 worth of Molycorp. In 3 years, based on the numbers above, I should have at least €100,000.

Hell of a Hunch

As of close of business May 3rd, 2016, my investment in Molycorp is worth a princely €91. Yup, a drop of 99.09% in the 3 years since the original tip above was published. Even an investment in the much maligned Bank of Ireland would have given you a 50% gain over that same period of time.

Investing at that time in Apple, despite the warnings at the time in the article, would have returned you a near 60% gain on your investment as of May 3rd, 2016.

This particular journalist would be a very big fan of gold as well. In the same period of time, a €10,000 investment in gold would now be worth about €8,750. Better than Molycorp, I guess.

Molycorp, the 5 year journey from USD$76 to USD$0.05
Molycorp, the 5 year journey from USD$76 to USD$0.05

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