|
 The
Money Management Newsletter: General
Interest
Bre-X marks the spot
By Rob Whipp
Money Management Newsletter - June 1997
It appears as if the Bre-X scandal will be making news
for a long while to come with all the pending lawsuits against the company
principals, the metallurgy firms that did the assaying
of the core samples and the brokerage
firms that sold shares
to the public. The lawsuits in most cases will focus on either fraud or
negligence or both on the part of the defendants as investors try to recoup
some of their huge losses.
While this whole debacle is certainly one of the largest
stock market frauds ever, with one or more persons tampering with the
core samples and others surely being aware of this, it will be up to the
courts to determine who did what and who knew what with respect to the
fraud charges. Arguments of negligence on the other hand will focus on
two issues: to whom did the defendant owe a duty and if they had a duty
did they meet reasonable standards in fulfilling it?
While it is fashionable to sue anyone and everyone these
days and lawyers will probably line up to represent claimants, those doing
the finger pointing should also consider pointing their fingers at themselves
because I am sure they would fail the negligence test on their own behalf.
What do I mean by this? Look at it this way. An investor
owes a duty to himself and should take reasonable precautions to protect
his or her downside in any investment they make. Two continuously opposing
forces for any investor are fear and greed. There is an ongoing battle
between the two and at some point the fear of losing ones money (fear
factor) usually overcomes ones desire to maximize investment earnings
(greed factor). You only have to look at the number of people who in recent
years have fled the safety of GIC
investments for the potentially higher returns of mutual
funds to see an example of greed wearing down fear in the battle.
Some of the articles I have read surrounding Bre-X have
commented on novice investors plowing their life savings into the stock
while others, not content to use just their own money, borrowed heavily
to try and maximize their gains.
These were people who might normally ponder for days or weeks on a vehicle
purchase or who closely inspect the produce at the super market. However
with Bre-X, they invested large sums of money in a single company with
no earnings
and which had only one unproven asset, which was thousands of miles away
in a foreign jungle.
The lawsuits will probably claim that these investors
were unsophisticated, that the Bre-X shares were unsuitable for them and
that they were fast talked by some broker into loading up on the stock.
While some fast talking may have taken place, after all brokers are sales
people, what had these unsophisticated investors been doing with their
money before Bre-X came along?
Most GIC investors will not go over their CDIC
limit even with a major bank and many view mutual funds which individually
invest in many stocks as risky. So how in the world could anyone convince
someone like this to invest in such a high risk venture? I suspect that
many didn't need convincing but instead rushed headlong into the arena,
where greed scored a knockout over fear. Unfortunately, while fear was
unconscious, greed bet the farm on Bre-X.
* * *
|
|
Use this link to load a printer-friendly
version of this document. |
Have a question regarding this article? Use our feedback form to send us a note.
file=" 1998, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700 
| 
