Wednesday, April 25, 2018

My Worst Investment Ever -- Part II

     After I graduated from college my parents gave me a little money -- the money left over from my college fund, back when college wasn't so terrifically expensive. As I recall my grubstake was around $8,000.

      So this was in the 1970s, when I was young and thought I knew everything. I decided to invest in the stock market and bought 100 shares of a high-flying computer company called Memorex. I purchased the stock at something like $80 per share. I held on for the next few months, and then the next few years, as the stock drifted down (just a slight bump in the road, thought I), then started to fall more precipitously (oh, this is ridiculous, I said), and then plummeted to hit bottom at around $2 a share.

     I held on for a little while longer. It resurfaced to $20-something, and I took the opportunity to sell. Memorex later went bankrupt and was gobbled up by another computer company for pennies on the dollar. My only consolation: I lost more than half my money, but I could have lost it all.

     Why am I confessing to my bone-headed investment decision of long ago? So, perhaps, other people can learn from my mistakes.

      However, I myself am a slow learner. When I was older, and much wiser, I read Peter Lynch's book One Up on Wall Street. He offered a strategy for investing in stocks and, along the way, recommended a number of individual companies.

     I bought into one that looked particularly promising to me. It was a string of nurseries. This company was going to consolidate the nursery business and become the Home Depot of plant stores. Only it didn't happen. I got in at around $20. The stock went down to $5, then $2. And then it bit the dust. I got out at around the $3 mark -- again, losing more than half my money.

     By the way, to be fair to Peter Lynch, I later went back and read his book again. Virtually every other company he recommended did well. My pick was the only one that turned out to be a complete disaster. Go figure.

     So with this record of investing, you might be feeling sorry for my daughter who, if you read my last post, you know had her heart set on going to college. How was her dad going to pay for it?

     Okay, so there's a part of me that thinks I am somehow special, and smarter than everyone else. This is the part that gets me in trouble. But there's another part of me that realizes maybe, just maybe, I'm not as smart as I think I am. I mean, when you think about it, how could a middle-age, middle-class guy, with a middle-management job, who lives in the suburbs with his wife and two kids, know more about the stock market than the people with economics degrees and advanced math skills and high-profile jobs on Wall Street?

     So ultimately I did make some money in the stock market -- but not because of my financial acumen or impeccable market timing. The way I made money was by having funds taken out of my paycheck, month after month, year after year, and having them automatically deposited into a low-cost mutual fund.

     That's how I was able to retire when I did. And by doing the same thing for my daughter, first in a separate account in her name, and later in a 529 account, I was able to afford to send her to college. It sure helped that she won a few thousand dollars worth of scholarships. But the bulk of that tuition was paid from the New York State College Savings Plan, where I deposited a hundred-some dollars every month, year after year, into some boring old fund -- and hardly ever even looked at how it was doing. And then, low and behold, 18 years later, I was able to start sending $30,000-plus in tuition money to a college in California.

     The lesson? It might be more fun to invest in high-flying stocks, or real estate, or other exotic instruments that you don't know much about. But for most of us, it's much more profitable to invest a small amount of money on a continuing basis in a tried-and-true, run-of-the-mill widely diversified stock fund. Even legendary stock-picker Warren Buffett agrees. It's so easy . . . why do we make it difficult for ourselves?

13 comments:

DJan said...

When I was working and putting money into stocks, it was managed by TIAA-CREF. I only decided how much went to stocks and how much went to guaranteed investments. I could choose from high risk, medium risk, and low risk. I went for the middle and now receive a decent monthly annuity that will last for the rest of our lives. Your story is instructive, Tom. I'm glad I didn't have to make choices about which stocks to invest in. :-)

Barbara M said...

I have never had any luck with investing. When I was working for big biz and we had a choice in where I money was invested. At the time everything was going caput so wherever you moved your money you still lost!! So sad when others made a lot before and after but that's life in the investing world.

gigihawaii said...

Interesting post. I wish I had invested in mutual funds.

retirementallychallenged.com said...

Although I have some money in individual stocks, most is in index and ETF funds and I'm slowly moving it all into these boring workhorses. It sounds like you did pretty well despite a few false starts, but good for you for trying and for being smart enough to change course when things didn't work out.

Heidrun Khokhar, KleinsteMotte said...

The outcome in part two was positive. Your regular deductions were a good move.

retirementreflections said...

This is very wise advice, Tom, with a great final question!

Olga Hebert said...

When I started my first teaching job we had two days of orientation for newbies prior to the start of classes. One of the talks was from veteran teachers who urged everyone to join the teacher retirement fund AND start slowly investing. It was not an easy thing to do. I was not making a lot of money and I was supporting my husband in college plus having two kids. Money was tight and retirement seemed an impossibly long time off. But that advise stuck with me and I am glad it did.

Pia said...

Today I half love investing as a major part of my income. Yesterday I wanted to kill somebody.

My dad was born in an apartment without a pot to pee in. He studied the stock market and made his first investment at 16. The brokers laughed, thought he was probably an idiot and gave him the shipping clerk to act as his broker. Yes, my dad did very well and the shipping clerk became president of the company—but ended up as a cab driver. Heard about that all my life. (My father had an inspirational or not story for every ocassion)

My dad made me promise never to put more than 10% of my money in the stock market. But he died in 1991 when you could make great money from bonds. I actually went to my mother (who according to family lore still had the first dollar she ever made at her first job) for absolution.

For many reasons I lost a lot in 2008—first time ever. I will probably never have what I had but I don’t have large monthly expenses, and would like my tombstone to read “she wasn’t much but she never had debt” And I live five blocks from the beach—not a bad way to live.

It amazes me how many people, nobody here, think they know everything. I know you can start with nothing, have everything, and end with nothing. Fortunately my parents got to travel to every country Americans were let into—their only indulgence—and eating out with friends, family, and/or their two favorite daughters.

Tabor said...

My history with the market is much like yours, but my first investment returned 140%. But I realized that I was not a gambler and also started an investment fund with my paycheck and today am able to have a very comfortable retirement.

Russ said...

I really enjoyed your site, you have talent, congrats. I am a new retiree, blogger, writer, all fledgling at this point. If you would take a look at mu site and provide any insight you may have, It is a retirement site in it's infancy as I am sure you can tell. It is not financial but I want to look at life form the having fun angle. Thanks.

David @ iretiredyoung said...

I reckon that we could have an interesting competition about worst investments, and I'm fairly confident that I'd be right up there with the leading losers!

Low cost index funds is something I've found out about in the last year or so. Although I'm slowly converting to them, being already early retired I have a lump sum to invest rather than hundreds of smaller monthly contributions. I can tell you that this lump sum scenario really makes it scary just now. Well, fingers crossed...

Anonymous said...

I agree with low cost index funds. John C. Bogle has made that quite clear assuming you actually spend less than you earn….and invest it. However, will there be a day of reckoning? A crash so bad it makes the 1930s Depression look decent? Can the stock market always go up over time in spite of $21 trillion in debt (projected to go to $30+ trillion)? Uncle Sam ran out of money years ago. The stock market is basically legalized gambling because if you are buying…..some else is selling (except for IPOs). One party is betting the stock is going up and the other party is betting that the stock is going down. On the other hand, can we ever expect interest rates to rise up to their “normal” 5-6%? Probably not because Uncle Sam can not afford to pay substantially higher interest rates on the $21 trillion national debt. We are sailing in uncharted waters.

Tom Sightings said...

No doubt, investing in the stock market is a gamble. But the market offers better odds than a casino. The stock market pays back about $1.07 for every dollar we wager, while a casino only pays back about 92 cents for every dollar we wager. But how to play it? I thought when Trump got elected and the market went down 700 points, that it would go down another 700 points. Instead it went back up, and kept going. A company reports good results, and the stock goes down; a company reports bad results, and the stock goes up. Go figure . . . which is why in most cases a fund will perform better than you or I ever will.