Ethical Dilemma. Carlo and Rita's daughter just celebrated her 16th birthday and Carlo and Rita realize they have accumulated only half the money they will need for their daughter's college education. With college just two years away, they are concerned about how they will save the remaining amount in such a short time. Carlo regularly has lunch with Sam, a coworker. While discussing his dilemma of financing his daughter's education, Sam tells Carlo about an investment that he made based on a tip from his cousin Leo that doubled his money in just over one year. Sam tells Carlo that Leo assured him there was very little risk involved.
Carlo asks Sam if he will contact Leo to see if he has any additional hot tips that could double his daughter's college savings in two years with virtually no risk. The next day at lunch Sam gives Carlo the name of a stock that Leo recommended. It is a small start-up company that Leo believes will double within the next 24 months with virtually no risk. Carlo immediately invests his daughter's college fund in the stock of the company. Six months later, Carlo receives a letter from the company announcing they are out of business and closing their doors. Upon calling his broker, Carlo finds the stock is now worthless.
a. Comment on Leo's ethics when assuring his friends and relatives that the investments he recommends can produce major rewards with virtually no risk.
b. What basic investing principle did Carlo forget in his desire to fund his daughter's college education?