Learning by Erring
IMAGINE AN AGE long ago, before the internet. Not only that, it was so long ago that it was before most Americans cared about the stock market. Unimaginable? Well, it isn���t to me.
When I came of age in 1987, the stock market was a fantasyland. It was a place inhabited by your dentist, a friend���s father who was a lawyer, or that banker your dad knew from the Knights of Columbus. People like my parents, a janitor and a secretary, lived in a different world of passbook savings accounts, certificates of deposit and���if they were lucky���pensions. It was so long ago that if, for some bizarre reason, you wanted to know the price of an individual stock, you had to look it up in the newspaper���s business section���one that was printed on paper.
Most people���s knowledge of the stock market was limited to hearing that ���the Dow closed up 12 points in light trading��� on the 11 o���clock news. The market was such a non-story that when, on Oct. 19, 1987, the S&P 500 dropped 20.5% in the largest one-day percentage decline in its history, it passed me by nearly unnoticed. The only vague recollection I have is a fellow student asking if I���d ���heard what was happening with the stock market.��� I hadn���t and went back to studying or, more likely, watching General Hospital.
All that changed in the spring semester of my senior year, when I took engineering economics, an elective taught by Dr. Joe McNeill, P.E. I give his name this way because I remember him walking into the classroom and writing his name on the chalkboard in exactly that way. I think the good doctor was proud of his P.E.���professional engineer���license. When my fellow students subsequently spoke about him, we always called him ���Dr. Joe McNeill, P.E.���
Dr. Joe McNeill, P.E., taught a course that consisted of three parts:
Economic fundamentals, which included terms like net present value, internal rate of return and weighted average cost of capital. He taught us how to calculate the value of today���s dollar at some future date. Like most people, I realized that time was money, but the theory was eye-opening.
Saving and budgeting, because setting aside a significant portion of your income could lead to wealth, career options and early retirement.
Stock market basics, because this was where you needed to invest your savings. By doing so, you could become rich. It all seems so commonplace now���invest and grow rich���but back then, to the son of blue-collar parents, it was a revelation.
Using a special student rate, he made us subscribe to The Wall Street Journal. In a way, the Journal��was better than the internet because, while it contained a wealth of information, it left out much of the nonsense that the internet now reports as news.
You also have to realize that the Journal had a very different look and feel than it does today. First, the news stories did not contain any photos. If you were born in this millennium, this may blow your mind. No photos? Instead, the Journal used stylized black and white drawings that it called hedcuts. Second, it was only published on days when the stock market was open, not holidays or weekends. The idea was that whatever happened didn���t really matter���until the stock market opened.
The front page had a very regimented look, with six vertical columns. Each one covered a specific topic like global news, story summaries, human interest and weekly reports. I can still recall Dr. Joe McNeill, P.E., teaching us how to read the Journal, highlighting what to read first and where to focus our time. He also mentioned that the fourth column was about human interest, adding, ���You don���t need to waste your time on this.���
I have two distinct memories of my time with Dr. Joe McNeill, P.E. One was that, as a reward for having the highest grade in the course, I received a six-month subscription to The Journal and a plaque. This was given to me with my proud parents in attendance. The second was the realization that I needed to start saving as much as possible and invest it in the stock market.
Buying past performance.��The course required that I research a specific mutual fund. The one I picked was the hottest mutual fund then in existence, Fidelity Magellan Fund, managed by the hottest mutual fund manager then in existence, Peter Lynch. At that time, Lynch was possibly the most famous investor in the world due to the outsized returns he produced at Magellan, averaging 29.2% annually over the 13 years he managed the fund.
His secret, as he explained in his bestselling investment books, was working long hours, rigorous fundamental analysis and following his wife to the store. For example, he bought shares of HanesBrands based on the recommendation of his wife, who���while food shopping���came across the company���s egg-shaped plastic containers, called L���eggs, which held women���s stockings.
She purchased a pair and raved about them to her husband, who promptly bought shares in Hanes for Magellan. It was among those investments that increased 1,000% in share price, or ���10-baggers��� as Lynch called them. He had plenty of 10-baggers���over 100���and he made successful investing seem like the easiest thing in the world.
As soon as I graduated, I started investing in Magellan and quickly learned a valuable lesson about active mutual funds, namely that ���past performance does not guarantee future results.��� In this case, Lynch retired soon after I���d invested, as the stress of trying to beat the market was becoming an issue���another drawback of active investing.
His replacements didn���t have the magic touch of their predecessor. I soon realized that, while I didn���t mind paying Lynch an outsized expense ratio for his outsized returns, I didn���t see the benefit of paying his successors the same expense ratio for their underperformance. I started to look around for other places to invest my savings.
Fool���s gold. In the mid-1990s, while living in Hawaii, I attended an investment seminar in a hotel conference room given by a man named Harry Bellefontaine. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation Mr. B had given. He mentioned that he thought both the stock market and Hawaiian real estate were overvalued. Indeed, he���d sold most of his stocks and his house. Because inflation was coming, he said that gold and silver were the way forward. Not just any gold and silver, though, but collectible coins���which he sold.
It was most likely the historic allure of gold coins, along with greed, but I bit and bit hard. Among other coins, I bought 20 half-ounce uncirculated 1991 American Gold Eagles. I can still remember leaving Mr. B's offices slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took the coins to my bank, where now I had the added benefit of paying $100 a year to rent a safe deposit box.
Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady Madoff-like rise in the value of my collection. Then, one day, I was watching TV and heard a teaser for the local nightly news that went something like, ���Local financial advisor scams gold investors, news at 11.��� Well, that had my attention.
When I tuned in at 11, I almost cried. There was the station���s investigative reporter saying numerous locals may have been scammed by investing in rare coins. In the background, they ran grainy undercover footage of guess who? Mr. B. It appears they couldn���t interview him, as he had fled Hawaii on a boat to parts unknown. I almost crapped my pants.
A few weeks later, I was contacted by a different coin dealer, who offered a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter. He informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy. But my mood wasn���t helped when, at the conclusion of the consultation, he asked if I���d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.
Built to last���maybe. Soon after my Gold Eagle gambit ended, I read a fascinating book titled Built to Last by Jim Collins��and Jerry I. Porras. It was the must-read business book of the 1990s and detailed an exhaustive study proving that some companies were just plain better than others.
The idea was that these select companies were ���built to last��� because they all followed similar paradigms, such as setting ���big hairy audacious goals������called BHAGs���like Boeing betting the company on the 747. Or by creating ���cult-like cultures������like Nordstrom providing dazzling customer service. Or by promoting ���homegrown management������like Procter & Gamble, which developed such a deep bench of talent that it never went outside to hire its CEO.
I thought it obviously followed that, since these were great companies, they would be great investments, too, and make a perfect recipe for a stock portfolio. That worked fine for a few years. But it turned out my recipe also included a few unappetizing ingredients���once-great companies that soon fell on hard times. Like Citibank, a penny stock amid the Great Recession of 2008-09. And Fannie Mae, mentioned in the follow-up book titled Good to Great, which was placed in conservatorship in 2008. And GE, whose long slide ended in near-bankruptcy in 2008. And Motorola, which was deemed irrelevant by the market in the late 2000s after the introduction of smartphones.
Master investor���briefly. In 1999, I read an article written by Paul Sturm in the��much-missed��SmartMoney��magazine. It was a comprehensive review of a security I���d never heard of before called a master limited partnership (MLP).
An MLP is a publicly traded company that has the tax benefits of a private partnership. Its income is taxed but not its distributions. That meant investors like me could defer taxes owed, sometimes almost indefinitely. Due to the vagaries of the tax code, MLPs are mostly limited to oil and gas pipeline companies.
To me, they seemed like the perfect security: tax-deferred distributions, rich cash flow, inflation-protected and high-yielding. We���re talking companies like Suburban Propane, NuStar Energy, Kinder Morgan and TEPPCO Partners. I felt like Yankees��� manager Miller Huggins reviewing his lineup card for the 1927 World Series: every player a heavy-hitter and reliable. Would you say no to investing in Babe Ruth and Lou Gehrig���on a tax-deferred basis to boot?
I bought my fill of MLPs and was rewarded richly, even though the K-1 partnership forms were a pain when it came time to file my taxes. But who am I to complain? For 10 golden years, I felt like a youthful Warren Buffett, consistently outperforming the S&P 500 with less volatility.
But alas poor Yorick, no security is perfect. I came to realize in time��that every��publicly traded company will borrow to the limit of its cash flows. I won���t bore you with the details of the painful deleveraging and subsequent MLP selloff by retail investors, but it was death by a thousand cuts. Since the Great Recession of 2008-09, my MLP lineup has reliably underperformed the S&P 500. Worse, one of my beloved ���Babe Ruth��� investments was restructured, sticking me with a Ruthian-sized tax bill, plus its distributions were reduced and the share price cut in half. As Job said, ���The Lord giveth, and the Lord taketh away������and then some.
Wait, there���s more. In 2000, I bought stock in a company that used the latest technologies to revolutionize the way multiple business lines did their business. A company that only hired the smartest people to work on cutting-edge projects that would change the world. Led by an even smarter CEO who claimed that many existing businesses were dinosaurs and would soon be extinct.
Unfortunately for me, this company wasn���t named Amazon. It was called Enron. Soon after I made my investment, then-CEO Jeff Skilling resigned to ���spend more time with family.��� Within months, Enron declared bankruptcy���the largest in U.S. history until then. I hung on for a little while because, as my mother used to say, ���hope springs eternal.��� But I eventually sold to harvest some very large tax losses.
The subsequent fraud convictions of Enron���s CEO, CFO and the chairman of the board���along with the collapse of its complacent auditor, Arthur Andersen LLP���were of little consolation. Enron not only shook my faith in the decency of man, but also in the wisdom of picking individual stocks.
This mood only grew on me with the subsequent significant devaluation of other ���can���t miss��� investments that I owned. Like Thornburg Mortgage, which went bankrupt in 2009. Or Medallion Financial Corp., which was such a stinker that it changed its ticker symbol from TAXI to MFC to hide. And International Business Machine���but at least I wasn���t alone in that gradual meltdown.
All the lemons that I���d chosen made me start to doubt my stock-picking ability and realize that maybe it was impossible to beat the market. The outperformance of my MLPs early on had made me believe that I possessed superior analytical skills. The subsequent underperformance by the same MLPs���plus all the other lemons I���d picked���disabused me of this notion.
While losing money on my clunkers was bad enough, it also filled me with an amount of anxiety and shame that wasn���t offset by my few-and-far-between winners. Because there were some in my portfolio, even if I eventually realized they might be due more to good luck than financial acumen. These included:
I purchased shares based on my wife���s orthopedic analysis, which was in turn based on the injection of a Genzyme-produced drug called Synvisc into her bad knee. Synvisc is a natural joint lubricant and cushion, synthesized from the cockscomb of a��rooster���the feathers on the top of his head. Chicken feathers, I thought. I knew that Peter Lynch would approve, so some shares were purchased. A few months later Sanofi bought out Genzyme and I received a 37% annualized return.
Monarch Cement. I purchased 100 shares at $28.50 based on a reverse stock split arbitrage opportunity offered to owners of record. The stratagem had the company buying back stock at $30 a share for a quick $1.50 gain. But it turned out that, due to a grammatical issue, I was not an ���owner of record,��� so the company didn���t buy back my shares. It all worked out in my favor, though, as my unsold shares subsequently tripled in value, leading to an annualized return of more than 20%.
In 2009, my mother gave me some money for Christmas. I used it to buy stock. I decided to invest it in a company she would be able to understand, so I picked the food distributor Sysco. I thought it could be a way we could share my interest in the stock market. I wrote her a ���thank you��� note, including specifics about the company, and mentioned I would update her now and then on its performance.
She may not have completely understood what I said, as she subsequently informed me that she ���didn���t need any stock tips.��� Since purchasing it in early 2010, Sysco has easily outperformed the S&P 500. Unfortunately, my mother had only given me $25.
The road to indexing. Over time, I started to lose interest in doing the deep research that was required to invest in individual stocks. I found I would rather spend my time working out, reading about World War II and traveling. Since it was obvious that I previously hadn���t spent enough time researching, common sense told me that reduced research would not lead to better results.
All this led me, slowly but surely, to shift my investments from hand-picked stocks to low-cost index funds like the Schwab Total Stock Market Index Fund, iShares Select Dividend ETF and Fidelity 500 Index Fund. These were added to a portfolio that already contained a fair amount of low-cost index funds as, thankfully, my 401(k) didn���t give me any other options. While low-cost index funds weren���t as sexy as Amazon or Apple, they were easier on my blood pressure and, more important, my ego.
When I retired a few years ago, I looked back at how I did. What kind of grade, I wondered, would Dr. Joe McNeill, P.E., give me? I think he���d be proud of my ability to save. As I tell fellow investors, the size of my portfolio is proportional to the size of my frugality.
He���d probably be disappointed, though, in many of the clunkers I���d invested in. How could I explain away Enron? He might, however, be proud that I���d learned from my mistakes and subsequently invested enough in low-cost index funds to allow for my early retirement.
Dr. Joe McNeill, P.E., was a tough grader. Still, I think he���d give me a ���B.��� But maybe not a plaque.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.
When I came of age in 1987, the stock market was a fantasyland. It was a place inhabited by your dentist, a friend���s father who was a lawyer, or that banker your dad knew from the Knights of Columbus. People like my parents, a janitor and a secretary, lived in a different world of passbook savings accounts, certificates of deposit and���if they were lucky���pensions. It was so long ago that if, for some bizarre reason, you wanted to know the price of an individual stock, you had to look it up in the newspaper���s business section���one that was printed on paper.
Most people���s knowledge of the stock market was limited to hearing that ���the Dow closed up 12 points in light trading��� on the 11 o���clock news. The market was such a non-story that when, on Oct. 19, 1987, the S&P 500 dropped 20.5% in the largest one-day percentage decline in its history, it passed me by nearly unnoticed. The only vague recollection I have is a fellow student asking if I���d ���heard what was happening with the stock market.��� I hadn���t and went back to studying or, more likely, watching General Hospital.
All that changed in the spring semester of my senior year, when I took engineering economics, an elective taught by Dr. Joe McNeill, P.E. I give his name this way because I remember him walking into the classroom and writing his name on the chalkboard in exactly that way. I think the good doctor was proud of his P.E.���professional engineer���license. When my fellow students subsequently spoke about him, we always called him ���Dr. Joe McNeill, P.E.���Dr. Joe McNeill, P.E., taught a course that consisted of three parts:
Economic fundamentals, which included terms like net present value, internal rate of return and weighted average cost of capital. He taught us how to calculate the value of today���s dollar at some future date. Like most people, I realized that time was money, but the theory was eye-opening.
Saving and budgeting, because setting aside a significant portion of your income could lead to wealth, career options and early retirement.
Stock market basics, because this was where you needed to invest your savings. By doing so, you could become rich. It all seems so commonplace now���invest and grow rich���but back then, to the son of blue-collar parents, it was a revelation.
Using a special student rate, he made us subscribe to The Wall Street Journal. In a way, the Journal��was better than the internet because, while it contained a wealth of information, it left out much of the nonsense that the internet now reports as news.
You also have to realize that the Journal had a very different look and feel than it does today. First, the news stories did not contain any photos. If you were born in this millennium, this may blow your mind. No photos? Instead, the Journal used stylized black and white drawings that it called hedcuts. Second, it was only published on days when the stock market was open, not holidays or weekends. The idea was that whatever happened didn���t really matter���until the stock market opened.
The front page had a very regimented look, with six vertical columns. Each one covered a specific topic like global news, story summaries, human interest and weekly reports. I can still recall Dr. Joe McNeill, P.E., teaching us how to read the Journal, highlighting what to read first and where to focus our time. He also mentioned that the fourth column was about human interest, adding, ���You don���t need to waste your time on this.���
I have two distinct memories of my time with Dr. Joe McNeill, P.E. One was that, as a reward for having the highest grade in the course, I received a six-month subscription to The Journal and a plaque. This was given to me with my proud parents in attendance. The second was the realization that I needed to start saving as much as possible and invest it in the stock market.
Buying past performance.��The course required that I research a specific mutual fund. The one I picked was the hottest mutual fund then in existence, Fidelity Magellan Fund, managed by the hottest mutual fund manager then in existence, Peter Lynch. At that time, Lynch was possibly the most famous investor in the world due to the outsized returns he produced at Magellan, averaging 29.2% annually over the 13 years he managed the fund.
His secret, as he explained in his bestselling investment books, was working long hours, rigorous fundamental analysis and following his wife to the store. For example, he bought shares of HanesBrands based on the recommendation of his wife, who���while food shopping���came across the company���s egg-shaped plastic containers, called L���eggs, which held women���s stockings.
She purchased a pair and raved about them to her husband, who promptly bought shares in Hanes for Magellan. It was among those investments that increased 1,000% in share price, or ���10-baggers��� as Lynch called them. He had plenty of 10-baggers���over 100���and he made successful investing seem like the easiest thing in the world.
As soon as I graduated, I started investing in Magellan and quickly learned a valuable lesson about active mutual funds, namely that ���past performance does not guarantee future results.��� In this case, Lynch retired soon after I���d invested, as the stress of trying to beat the market was becoming an issue���another drawback of active investing.
His replacements didn���t have the magic touch of their predecessor. I soon realized that, while I didn���t mind paying Lynch an outsized expense ratio for his outsized returns, I didn���t see the benefit of paying his successors the same expense ratio for their underperformance. I started to look around for other places to invest my savings.
Fool���s gold. In the mid-1990s, while living in Hawaii, I attended an investment seminar in a hotel conference room given by a man named Harry Bellefontaine. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation Mr. B had given. He mentioned that he thought both the stock market and Hawaiian real estate were overvalued. Indeed, he���d sold most of his stocks and his house. Because inflation was coming, he said that gold and silver were the way forward. Not just any gold and silver, though, but collectible coins���which he sold.
It was most likely the historic allure of gold coins, along with greed, but I bit and bit hard. Among other coins, I bought 20 half-ounce uncirculated 1991 American Gold Eagles. I can still remember leaving Mr. B's offices slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took the coins to my bank, where now I had the added benefit of paying $100 a year to rent a safe deposit box.
Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady Madoff-like rise in the value of my collection. Then, one day, I was watching TV and heard a teaser for the local nightly news that went something like, ���Local financial advisor scams gold investors, news at 11.��� Well, that had my attention.
When I tuned in at 11, I almost cried. There was the station���s investigative reporter saying numerous locals may have been scammed by investing in rare coins. In the background, they ran grainy undercover footage of guess who? Mr. B. It appears they couldn���t interview him, as he had fled Hawaii on a boat to parts unknown. I almost crapped my pants.
A few weeks later, I was contacted by a different coin dealer, who offered a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter. He informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy. But my mood wasn���t helped when, at the conclusion of the consultation, he asked if I���d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.
Built to last���maybe. Soon after my Gold Eagle gambit ended, I read a fascinating book titled Built to Last by Jim Collins��and Jerry I. Porras. It was the must-read business book of the 1990s and detailed an exhaustive study proving that some companies were just plain better than others.
The idea was that these select companies were ���built to last��� because they all followed similar paradigms, such as setting ���big hairy audacious goals������called BHAGs���like Boeing betting the company on the 747. Or by creating ���cult-like cultures������like Nordstrom providing dazzling customer service. Or by promoting ���homegrown management������like Procter & Gamble, which developed such a deep bench of talent that it never went outside to hire its CEO.
I thought it obviously followed that, since these were great companies, they would be great investments, too, and make a perfect recipe for a stock portfolio. That worked fine for a few years. But it turned out my recipe also included a few unappetizing ingredients���once-great companies that soon fell on hard times. Like Citibank, a penny stock amid the Great Recession of 2008-09. And Fannie Mae, mentioned in the follow-up book titled Good to Great, which was placed in conservatorship in 2008. And GE, whose long slide ended in near-bankruptcy in 2008. And Motorola, which was deemed irrelevant by the market in the late 2000s after the introduction of smartphones.
Master investor���briefly. In 1999, I read an article written by Paul Sturm in the��much-missed��SmartMoney��magazine. It was a comprehensive review of a security I���d never heard of before called a master limited partnership (MLP).
An MLP is a publicly traded company that has the tax benefits of a private partnership. Its income is taxed but not its distributions. That meant investors like me could defer taxes owed, sometimes almost indefinitely. Due to the vagaries of the tax code, MLPs are mostly limited to oil and gas pipeline companies.
To me, they seemed like the perfect security: tax-deferred distributions, rich cash flow, inflation-protected and high-yielding. We���re talking companies like Suburban Propane, NuStar Energy, Kinder Morgan and TEPPCO Partners. I felt like Yankees��� manager Miller Huggins reviewing his lineup card for the 1927 World Series: every player a heavy-hitter and reliable. Would you say no to investing in Babe Ruth and Lou Gehrig���on a tax-deferred basis to boot?
I bought my fill of MLPs and was rewarded richly, even though the K-1 partnership forms were a pain when it came time to file my taxes. But who am I to complain? For 10 golden years, I felt like a youthful Warren Buffett, consistently outperforming the S&P 500 with less volatility.
But alas poor Yorick, no security is perfect. I came to realize in time��that every��publicly traded company will borrow to the limit of its cash flows. I won���t bore you with the details of the painful deleveraging and subsequent MLP selloff by retail investors, but it was death by a thousand cuts. Since the Great Recession of 2008-09, my MLP lineup has reliably underperformed the S&P 500. Worse, one of my beloved ���Babe Ruth��� investments was restructured, sticking me with a Ruthian-sized tax bill, plus its distributions were reduced and the share price cut in half. As Job said, ���The Lord giveth, and the Lord taketh away������and then some.
Wait, there���s more. In 2000, I bought stock in a company that used the latest technologies to revolutionize the way multiple business lines did their business. A company that only hired the smartest people to work on cutting-edge projects that would change the world. Led by an even smarter CEO who claimed that many existing businesses were dinosaurs and would soon be extinct.
Unfortunately for me, this company wasn���t named Amazon. It was called Enron. Soon after I made my investment, then-CEO Jeff Skilling resigned to ���spend more time with family.��� Within months, Enron declared bankruptcy���the largest in U.S. history until then. I hung on for a little while because, as my mother used to say, ���hope springs eternal.��� But I eventually sold to harvest some very large tax losses.
The subsequent fraud convictions of Enron���s CEO, CFO and the chairman of the board���along with the collapse of its complacent auditor, Arthur Andersen LLP���were of little consolation. Enron not only shook my faith in the decency of man, but also in the wisdom of picking individual stocks.
This mood only grew on me with the subsequent significant devaluation of other ���can���t miss��� investments that I owned. Like Thornburg Mortgage, which went bankrupt in 2009. Or Medallion Financial Corp., which was such a stinker that it changed its ticker symbol from TAXI to MFC to hide. And International Business Machine���but at least I wasn���t alone in that gradual meltdown.
All the lemons that I���d chosen made me start to doubt my stock-picking ability and realize that maybe it was impossible to beat the market. The outperformance of my MLPs early on had made me believe that I possessed superior analytical skills. The subsequent underperformance by the same MLPs���plus all the other lemons I���d picked���disabused me of this notion.
While losing money on my clunkers was bad enough, it also filled me with an amount of anxiety and shame that wasn���t offset by my few-and-far-between winners. Because there were some in my portfolio, even if I eventually realized they might be due more to good luck than financial acumen. These included:
I purchased shares based on my wife���s orthopedic analysis, which was in turn based on the injection of a Genzyme-produced drug called Synvisc into her bad knee. Synvisc is a natural joint lubricant and cushion, synthesized from the cockscomb of a��rooster���the feathers on the top of his head. Chicken feathers, I thought. I knew that Peter Lynch would approve, so some shares were purchased. A few months later Sanofi bought out Genzyme and I received a 37% annualized return.
Monarch Cement. I purchased 100 shares at $28.50 based on a reverse stock split arbitrage opportunity offered to owners of record. The stratagem had the company buying back stock at $30 a share for a quick $1.50 gain. But it turned out that, due to a grammatical issue, I was not an ���owner of record,��� so the company didn���t buy back my shares. It all worked out in my favor, though, as my unsold shares subsequently tripled in value, leading to an annualized return of more than 20%.
In 2009, my mother gave me some money for Christmas. I used it to buy stock. I decided to invest it in a company she would be able to understand, so I picked the food distributor Sysco. I thought it could be a way we could share my interest in the stock market. I wrote her a ���thank you��� note, including specifics about the company, and mentioned I would update her now and then on its performance.
She may not have completely understood what I said, as she subsequently informed me that she ���didn���t need any stock tips.��� Since purchasing it in early 2010, Sysco has easily outperformed the S&P 500. Unfortunately, my mother had only given me $25.
The road to indexing. Over time, I started to lose interest in doing the deep research that was required to invest in individual stocks. I found I would rather spend my time working out, reading about World War II and traveling. Since it was obvious that I previously hadn���t spent enough time researching, common sense told me that reduced research would not lead to better results.
All this led me, slowly but surely, to shift my investments from hand-picked stocks to low-cost index funds like the Schwab Total Stock Market Index Fund, iShares Select Dividend ETF and Fidelity 500 Index Fund. These were added to a portfolio that already contained a fair amount of low-cost index funds as, thankfully, my 401(k) didn���t give me any other options. While low-cost index funds weren���t as sexy as Amazon or Apple, they were easier on my blood pressure and, more important, my ego.
When I retired a few years ago, I looked back at how I did. What kind of grade, I wondered, would Dr. Joe McNeill, P.E., give me? I think he���d be proud of my ability to save. As I tell fellow investors, the size of my portfolio is proportional to the size of my frugality.
He���d probably be disappointed, though, in many of the clunkers I���d invested in. How could I explain away Enron? He might, however, be proud that I���d learned from my mistakes and subsequently invested enough in low-cost index funds to allow for my early retirement.
Dr. Joe McNeill, P.E., was a tough grader. Still, I think he���d give me a ���B.��� But maybe not a plaque.
Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.The post Learning by Erring appeared first on HumbleDollar.
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