Lessons From the Pits of Investment
AS I went through my financial records for 2007, I realized that — as usual — I had made a great many mistakes. I’d like to help you to avoid making the same mistakes, so here they are. They might be considered New Year’s resolutions. Or they might be called Lessons Learned.
As I was looking at my stock statements for 2007, I noticed I had done fabulously well — by my very modest standards — on my large, broad-market index funds (especially Fidelity Spartan Total Market and Vanguard Total Stock Market), on my Canadian and Australian index funds and on an emerging-market index fund and a developed-market index fund. But many of my individual picks had been clobbered.
My belief is that I am not alone here. Unless you are a thorough genius like Warren E. Buffett, buying individual stocks is tricky, especially in a wildly down market for financial stocks. My resolution for next year is that I will buy only broad indexes and Berkshire Hathaway, if I have any money left over after feeding our three dogs, six (yes, six) cats and my endless extravagance.
I especially got killed speculating on takeover candidates. I think I will leave that to bigger boys than me. Again, I will stick with the indexes.
Next, here’s a lesson I learned in a 12-step program and should have learned better: avoid contempt prior to investigation. When the financial stock meltdown started, I was on a television show with Peter Schiff of Euro Pacific Capital, who warned that Merrill Lynch could be in very bad shape. I glibly said that I thought that its problems were limited and that the stock was a buy. Mr. Schiff was completely right and I was wrong. I had no idea that Mother Merrill, where I have been a happy stockholder for years, had been turned into a such a wild house of high-stakes gambling. I apologize to Mr. Schiff for my dismissal of his views, which turned out to be far superior to mine in this area. (I could do without his acolytes sending me endless hate mail, though.)
In the same vein, I must remember that where Wall Street is concerned, a very healthy dose of skepticism is always merited. Just in the recent past, the movers on the Street have fooled us with junk bonds, savings-and-loan stocks, high-tech garbage, rotten collateralized mortgage obligations (although not as rotten as some think right now, perhaps) and their own highly questionable firms. The problem is always the same: nonsensical greed by the buyers and lack of fiduciary duty by the sellers. An extreme sense of skepticism is warranted whenever anything looks too good to be true anywhere. But if it’s coming out of Wall Street and looks complex, look out below.
Speaking of which, your humble servant expressed doubt about private equity and how it could keep making super returns by basically picking up a penny on the sidewalk, shining it up and selling it for a nickel, and then the next guy does the same and sells it for a dime. My doubts weren’t strong enough. It sure looks as if it was all a hot-potato game fueled by easy money. I got caught in it a bit with a few investments. It’s sort of terrifying that even I, a longtime investor, could be caught in that game. It was a small amount, but even that is too much.
On to spending: A famous Chinese philosopher famously said, “There is no calamity greater than lavish desires.” My own life is a sort of parable of national life. I spend way too much money, although it’s pennies by Wall Street standards. I think like a big baby: if I want it, it’s mine.
You cannot even imagine how many suits and jackets I have. It’s a bad joke, since I never wear any of them. I just wear the same pitiful shiny old clothes every day. This leads to endless self-laceration when I get my bills. On a national scale, it leads to low saving and poor preparation for the future. My goal for the future is to be a bit more careful about my spending. Maybe more than a bit.
Finally, this year as every year, I learn that there are a lot of people out there who are of more use to the planet than I am: my wife (the world’s best human), teachers, parents of autistic children, firefighters, nurses, doctors, police officers, social workers, the incredible superstars of the military and, most of all, their families.
I WILL say it until the day I die: the military family is the marrow in the backbone of America. And if it seems that I am too upset about financial fraud, I would just like to say that I often cannot sleep at night seething that men and women are giving their lives for us in faraway places while at home their country is being plundered by men in $3,000 suits who get multimillion-dollar severances when they are caught.
How many military families lost homes because of predatory lending? I know of at least two, and that’s just in my little world. My resolution for 2008 is to keep on plugging for those “little people” who are a lot bigger than the hucksters on Wall Street. And to stop being such an extravagant fool myself.