Post of the Day
January 14, 1999
My Dumbest Investment Folder
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Subject: At Least I Can't Do Worse
In March of 98 I came into some money to invest, on top of my 401K plan. I did a little (VERY little) research on the Web and discovered a medical company called FPA Medical Management (FPAM). Apparently they were growing quickly by acquisitions, going from nothing to a company with market value of $1 billion. The stock had been as high as $40 less than a year ago, but was down to $19. All the experts(?!?)said it was a "buy" or "strong buy", plus those Baby Boomers are all getting older, right? Besides, a health company can't be that dangerous. It looked like an aggressive new company to invest in for years to come, so I bought my shares. The stock price continued to fall, but I was in for the long term.
|"It looked like an aggressive new company to invest in for years to come, so I bought my shares. The stock price continued to fall, but I was in for the long term."|
Not much later the CEO left unexpectedly, and the new CEO postponed reporting earnings until the SEC absolutely would put his feet to the fire. Don't worry, I told myself, there could be a perfectly good reason for all of this, and you're in for the long term. So I held on. The share price did an incredible "down elevator" impersonation.
Finally, the quarterly results are released. FPAM's EPS were projected for 0.32/share - instead they were 0.01/share. Furthermore, this did not include one time losses that dwarfed the meager earnings this quarter, with more "one time losses" projected further down the road. OK, I told myself, now that they have new management, they can turn themselves around, and you're in for the long run. The stock price went from about $10 to $5 that day.
As the stock price continued to fall, I came to the conclusion that I couldn't be any luckier! What a buying opportunity for a long run investor like me! Bravely (blindly) I purchased even more FPAM stock, bringing my average share cost to about $8/share. Brilliant idea! It's a *health care* company, so they can't go under, and 40 years from now I'll be a major shareholder of the company keeping me alive! The price, like a retiree, continued to head south.
A month later, the new CEO announces that FPAM will be filing Chapter 11 bankruptcy, due to taking on too much debt in growing too fast, and losing cost controls due to growing pains. FPAM would announce details of its restructuring plan once it finished negotiating with its banks. Well, I told myself, many companies have come out stronger from Chapter 11, and how bad could it really be? It can't get any worse than this, can it? I'm still in for the long run! The share price dropped below $1.
|"In just over four months, during a bull market, I lost 100% of my "long-term" investment. It was an expensive learning experience for me."|
Finally, in July the restructuring plan is released. New shares will be issued, primarily to the major creditors, but also some to management as an "incentive" to work harder and better than they did for us. The existing shares would be declared null and void. My marathon runner just hit the wall.
In just over four months, during a bull market, I lost 100% of my "long-term" investment. It was an expensive learning experience for me. I learned:
1) Due a full "due dilligence" before you invest dollar one in anything.
2) Risk is real. You can lose a lot, in a hurry.
3) Never say "It can't get any worse...", because the universe sometimes takes such statements as a challenge.
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