Mistakes Happen

Last week I made a $13,000 mistake (a tax ruling, not in my favor due to most impressive stupidity on my part). In Warren Buffett terms, that mistake cost me $226,842 ($13,000 compounded at 10% for 30 years – see boys, I do know how to do math).

I won’t sugar coat it. It sucked. Big time.

But I can guarantee that it won’t be my last mistake, nor my biggest (yeah, much to look forward to). Making mistakes is part of investing (or any financial decision for that matter).

I was once given some words of wisdom from an executive (after losing a million dollars, see full story here). He told me that mistakes happen, mistakes will continue to happen and the harder I played, the bigger the mistakes I would make.

And I do see myself moving along the mistake curve. I started with the small financial mistakes like thinking the stuffing envelopes for cash scam was legit. My learning there? Ask, ask, ask for opinions before shelling out hard earned money (in this case, $5, not much but I was dead broke at the time).

I progressed into mistakes like following hot investment fads (dot com, dot gone and ouch afterwards). That learning? Stocks that everyone is buying are usually overpriced (and ready for a correction).

My recent blooper taught me that I should never invest in something for tax savings reasons alone (complete dumbness). I was talking to an investment buddy of mine and he laughed. Seems that mistake is a rite of investing passage.

Do you see the trend here? Mistake, learning, different mistake, different learning, yet another mistake, yet another learning. Mistakes are fine (okay, they aren’t fine, they’re bloody painful) as long as we learn from them. Of course, it would be easier to learn from other people’s mistakes but who is smart enough to do that?

Some of us get stuck on one mistake (like following hot investment fads) and never move forward. As with school, the financial world forces us to sit through investment lessons until we finally learn what we’re meant to learn (or drop out). If I find myself continually losing money, I know that I haven’t learned an important lesson.

Of course, I don’t recommend deliberately making mistakes just so you can learn from them. Believe me, try for perfection and let the mistakes happen naturally. However, when they do happen, only mentally flog yourself for a day or two. Then chock it up as tuition fee, learn your lesson and move on.

Now that I’ve shared some of my idiotic moves with the world, why don’t you share some of yours? What have been some of your biggest, most creative mistakes (including scams fallen for)?

Companies In Hock

I was watching a financial call in show last week. The financial “expert” examined stock after stock. Many he dismissed because of the company’s debt load. It didn’t matter why they were carrying the debt, how recent the debt, or what kind of debt it was, his opinion was that all debt was bad.

What a load of hooey.

One of the companies he was talking about was an ice company I own shares in. Yes, the company was carrying debt. Why? Because they just acquired a competitor.

Having spent most of my working life in new business development, I’ve looked at quite a few acquisitions. When companies acquire other companies, they have two choices for financing, they can borrow or they can issue equity.

The former is the preferred choice. It’s easier. It doesn’t dilute ownership (affecting management stock options). It’s short term. If the acquisition is expected to cover its costs in one or two years, debt is used (if available).

The type of debt also matters. The more conservative the lender, the more likely the acquisition is sound (companies often have to sell lenders on why they need the money).

If the major purchase is new equipment and the lender is the equipment supplier, this usually means that either the supplier has little doubts about repayment or they feel that the asset is worth at least the debt offered (this doesn’t always hold true if the purchaser is a dominant player).

If the lender is a high brow, conservative bank, then again the bank fully expects to be paid back. The bank can be choosy about clients so their participation is reassuring to investors. If the lender however specializes in high risk ventures (the interest rate offered will be a glaring signal) then I, as an investor, would be nervous.

I don’t expect the company to start paying back the principal less than a year after acquisition. Acquiring a company is expensive that first year. There are legal fees, severance payouts for redundant employees, system conversion costs, etc. These one time charges will either gobble up the profits from the acquired company or require more debt (this debt should be factored into the acquisition calculation).

However, if there is not enough available debt (the purchase is too large or the company is already leveraged to the hilt), then the company will look at offering new shares. If the management is unsure about payback, again shares will be issued. Both situations make me as an investor nervous. It doesn’t mean I won’t invest but I will do more research before I do.

So no, not all debt is bad. In case of acquisitions, I actually prefer that the company borrow.

The Latte Factor: Not For Coffee Lovers

A good investor knows that most of investing is simple psyche 101, understanding people and what motivates them. That’s why the common advice, made popular by David Bach of the Finish Rich book series, of saving money on “little purchases such as lattes, fancy coffees, bottled water, fast food, cigarettes, magazines” makes me a tad bit crazy.

Little purchases? Find me a smoker that thinks cigarettes are a “little purchase.” Find me a coffee addict that thinks coffee is a “little purchase.”

Sure, the numbers make sense. On Bach’s website, he shows how a dedicated investor can take $5 of coffee savings a day and turn it into $948,611 in 40 years (at 10% beating most mutual funds but again, that’s a whole other post).

Wow. Impressive, right?

Except that in order to do this, the investor must kick a habit like drinking coffee or smoking. Not an easy thing to accomplish.

I know. Once upon a time, I was addicted to Diet Coke. Addicted, as in I had to have my hit every single day. I loved investing then (and still do) and I knew that I was wasting money on my cola a day habit so I tried quitting numerous times. I went through withdrawal (I was one grumpy bear…with the shakes, not a good combo) but I just couldn’t do it.

Forget a million dollars in 40 years, you could have promised me a million dollars a week from then and I still couldn’t do it. The motivation was not enough (I finally quit after developing a caffeine intolerance).

Any investing program requiring the participant to kick an addiction first is doomed to failure (only 2% of unaided attempts to stop smoking succeed even with 70% of all smokers wanting to quit). Actually any program requiring deprivation has a high chance of failure (negative motivation is substantially weaker than positive motivation).

That’s not saying that Bach’s advice is garbage. Far from it. Applied to expenses with no emotional connection to the investor, this advice rocks. It’s a great source of seed money.

I don’t mind shopping around for a few minutes to pay $500 less on insurance (for the same coverage). That $500 is the equivalent of 100 lattes but a lot less painful to the coffee lover.

Not a car fan (I only care that I can get from point A to point B safely), I don’t even mind paying $10,000 less by buying a good quality used car over a shiny new one. Heck, make it $9,998. I’ll spring for a new car scented air freshener. That’s the equivalent of over 5 years worth of lattes. Again, a less painful switch.

Just don’t ask me to give up my addictions (now Diet Ginger Ale and travel and steamy romance novels and…).

Mutual Funds Aren’t For Losers

A buddy quoted Robert Kiyosaki of Rich Dad fame to me a few days back, saying “Mutual Funds Are For Losers.”

(This same buddy invests in index funds which are technically mutual funds but that is an entire other post.)

Well, chock me up as a loser because I do hold mutual funds, both now and in the past.

Now, my emergency fund (or opportunity fund depending on whether you’re a half empty, half full type of person) is in a no load money market fund held via my bank. I can transfer in and out on the same day, have instant access to my cash, and I count it in the bond part of my portfolio make up. It isn’t going to make me rich but then, that is not the purpose.

But in the past, most of my holdings (meager though they were) were in mutual funds. You see I started investing $25 a month. Not much could be purchased with that (except maybe a few Starbucks coffees) and definitely nothing remotely diversified.

Add to that, I was completely ignorant in the ways of investing. I was an investment virgin. My only experience with investing was through safe and stable term deposits (or the equivalent). Yeah, I was a saver, not an investor.

I could have waited, saving my $25 in a high interest savings account until I could actually purchase something worthwhile (like a complete lot) but would this have pushed me to learn about the market? Would I have had the experience of comparing my mutual funds to other mutual funds? Looking at the investment make up, figuring out why the fund manager was making the changes in the fund, watching the market’s ups and downs?

Nope. With time pressures being what they are (tight, always tight), I would have said “I’ll learn that later” and never have. Without my own money in the market, there was no reason to do the work, no urgency.

I made my share of mistakes with my small, piddley dollars. I invested in sector funds that were “hot” (like technology, ouch) and got burned. I invested in bond funds when interest rates were rising. I lost hundreds, not thousands of dollars (the price of tuition). These were junior jammer mistakes and I was happy (okay, I wasn’t happy but…) to make them while still a junior jammer.

So do I think mutual funds are evil and only “losers” invest in them? Of course not. A mutual fund is just one tool in the investment toolbox. It will not always fit the job (unlike another buddy who thinks a hammer is good for all fixes) but its still available.

The Financial Guru

Back when I was a financial young’un, I went to one of those free seminars hosted by a mutual fund company. Speaking there was a financial “guru” that I had admired for some time. I had read his books, watched his weekly tv show, and scanned his newspapers columns. I really thought he knew anything and everything about finances.

He was selling a can’t lose investment that supposedly not only provided a good return but saved the investor on taxes too.

What a great deal, right?

Well, he wanted us to sign up immediately. Being the cautious sort, I preferred to take the info home, do my own research, and run it by some mentors (including my financial advisor).

All I bought at that seminar was a monthly subscription to his insiders newsletter priced at $120 for the year (a lot of money for an investor who was at that time only investing $25 a month).

The first month went by. Didn’t receive my newsletter. The second month went by. Still nothing. The third month came and I called the 1-800 number. No longer in service. I e-mailed the address given. Bounce back. Hit the website. No longer there.

In the meanwhile, I had looked into the investment. Hhhmmm…looked feasible but not something the tax people would be too happy with (are they ever happy?). Brought it to my mentors. One by one, they told me what was wrong with it. No use having mentors if they’re shy about giving their opinions. My mentors sure weren’t shy.

By the end of the year, I read in the newspaper that the “guru” was fighting charges, security fraud or something like that. Needless to say, the investors were being audited by the tax people (I get audited every year ‘cause I’m aggressive not ‘cause I try to scam the system). Note that the investors were audited. It didn’t matter that they took someone else’s advice. They were held responsible.

That $120 taught me a valuable lesson. I always, always, always do my own homework when looking into investments, no matter where the information is coming from.

I’ve worked with my financial advisor for well over a decade (we won’t say how well over…). I trust the guy. I know he’s about as anal and buttoned down as a man can get (yep, lots of fun at parties). I STILL do my own research on his suggestions. He is my advisor and that’s what I use him for…advice. I have the final say. I make the decisions.

Why am I sharing all this? Well, I’m no financial guru by any stretch of the imagination (goodness no), but I’m going to be talking about what has worked and has not worked (yep, I’m messed up, I’ve lost money, I challenge you to find an investor that hasn’t) for me. Key part of that sentence is “for me.” Personal finance is called that ‘cause its personal. That means what works for me might not work for you. No getting around it (and I’ve tried, believe me, I’ve tried), ya gotta do your own research.