How do a young mother and father save enough for their child’s education? Saving may not be the best way as it turns out. As young parents they should have a portion of their savings redirected to discovering Diamonds in the rough. These are stocks that are going to make a difference in their child’s life. And like diamonds in the rough, they will be difficult to find. There is risk of looking and not finding any diamonds; if it were easy to find diamonds they wouldn’t be worth so much would they?
In the investment field there are two types of ‘diamonds in the rough”. One is the old well known company that is about to explode due to new technology, and the second is the company that is just starting out and has something so unique that the stock will grow thousands of percent, creating a real bonanza!
Diamond No.1
An example of a company that is well known yet has tremendous upside would be Novo Nordisc. This pharmaceutical company has developed new products to address the diabetes epidemic and is very close to marketing multi billion dollar drugs that will dominate a part of the market that is growing worldwide. If you look at Novo, you will see a very solid performer that has not done much in the recent past. It is a good candidate for growth if its newest diabetes products make it to market as planned. The downside risk is if a competitor can come up with a product to beat the results of the Novo product. Your expected return for this stock would be to outperform the overall market over the next 1 to 2 years. It wasn’t always like this however. In the past Novo experienced huge growth.
Diamond 2
This diamond is very different than number 1, it is not well known and is a very new company. It is very hard to find but you can do it if you work hard and are willing to take a risk of losing your investment if it doesn’t pan out. This company is involved in very new and untried technology. This company is Isis Pharmaceutical.
What is interesting about these two companies in my opinion is that they are also very similar, the only difference is one is older and in a different lifecycle that the other. If you investigated Novo years ago it would look much like the much younger Isis based on the criteria I use to evaluate these diamonds.
The Criteria and Questions to Ask
1. Evaluate the founders and people making the company run.
2. What is the market for the product, size potential and demographics?
3. Who are their competitors?
4. What is the likelihood that investors will stay in the stock and ride it out over along time frame?
5. Who is the CEO and is he capable of leading the company?
6. Is the industry growing and what is the outlook?
7. Review the demographics of the market their product will address, is it growing and does it have the money to pay for the product?
8. What is my downside risk, and how much can I afford to lose?
9. Run the idea by knowledgeable investors, remembering that if it were easy to spot diamonds everyone would be rich and diamonds would be worthless.
The value of Novo in 1994 was around $5 per share; today it is worth $140, a 2800% increase! If you evaluated Novo in 1995 and compare it to Isis using the above criteria, you will see many similarities. The criteria for evaluating high risk stocks has served me well, not all winners by any means but when we were a young family without many assets, this proved an excellent strategy to prepare for our children’s education. Most importantly, a $1000 investment in Novo in 1996 is now worth $28,000, just about the amount of tuition and books for my alma mater for one year.
Take into account your own risk tolerance and read my book so you understand that this is one of the key features to investing for your child’s education. Those diamonds will lay undiscovered in the rough unless you do the digging and research to uncover them.