Wednesday, October 13, 1999

A Tale of Three fools


Ten years ago I found myself working in an earnest, average job in an engineering company, earning a modest income of about $35,000. I was in my mid-twenties and I was anything but Foolish back then. I kept my debts and outgoings low, it's true, but then blew the rest on foreign travel whenever I got the chance. As I saw it, I was spending five years of my life seeing the world and working in between to finance it.

I saved nothing during that period. Now, given that I'm writing a Fribble, you probably think I'm going to moan about how much I regret my former foolishness. I'm not. Far from it, in fact. I had a great time and stored up a vault full of memories and experiences. Je ne regret rien, as the French say. No, I want to tell you about two other fools -- colleagues and friends at the time -- folks who, as it happens, criticized me roundly for what they saw as my "foolishness" in blowing my cash on travel.

We'll call them Cedric and Esmerelda (their real names were equally weighty). They were nice people, if pretty dull and conventional. They worked hard and were sensible with their money (Foolish we might say). They didn't go out much and were frugal with their holidays and clothes and they saved regularly and invested in well-researched, tax-efficient ways. Both had modest two-up-two-down houses with modest mortgages, backed up with a nice pool of cash if anything went wrong. Dull, yes, but they were getting richer over time in the way they recommend at the Fool. Then it all went wrong.

Cedric and Esmerelda met at work and soon decided to marry. It was at about the time we in the U.K. were experiencing a "correction" in the housing market for the first time in decades. As assets, houses were depreciating, and quickly. Our couple decided (as many do) that they couldn't possibly live in either of their current houses (though either would have met their needs) and so they set about trying to sell. Now Ced and Esmy had bought their homes in a Bull market and were trying to sell in a Bear. They found that their homes were worth less than they'd paid for them, much less. In fact both houses were worth about $35,000 less than they'd cost, never mind years of interest payments on the loans.

A Foolish couple might have decided to live in one, rent the other and wait for the market to change. But by now our newlyweds had seen the executive home of their dreams and Foolishness was replaced by blind gotta-have-it. Just one thing stood in their way -- even at a loss, they couldn't sell.

So Ced and Esmy traded in their two, perfectly serviceable little homes. Same deal as trading a car -- you sell short and buy long. Between them they lost eighty-thousand bucks, but it didn't stop there. Their new home had been bought at top price during the beginning of the market downturn, so three years later it had lost a further $30,000. Esmy got pregnant, left her job and they had to sell again -- the mortgage was just too much to bear (or should that be Bear?). They'd lost a fortune, all their original stakes, all their savings. They'd survived, but they'd been fools. And I remember Esmy saying to me, just about the time their sale was going through, "What? Another holiday? You must have money to burn, you Fool!"

There's no righteous way to lose money; it's gone all the same, whether you enjoyed it or not. So, be Foolish, but don't stop enjoying life. And never be forced to sell short.

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