Tuesday, April 13, 1999

Lessons Learned the Hard Way

by FoolAroundNow

Let me share five months of insanity with you. After a few interviews/conversations with a professional money manager, Homer (whose name is changed to protect the Wise Man), my wife and I Wisely (or foolishly) decided to let him manage our nest egg. Homer described his style as a "value investor" who looks for undervalued stocks that will outperform the market with less risk than the high P/E growth stocks.

Homer charged us $1,000 to perform an initial analysis of our current situation and to get a look at his stock picks. Not knowing much relating to individual stock investing, who were we to dispute his picks? After all, he was the professional. We moved forward with Homer. His rate was 0.8% of our portfolio per year in fees (paid quarterly) and we still had to pay all commissions. In late October, Homer plowed all of our money into 35 stocks.

One of his "gems" was network switching systems company Tekelec (NASDAQ: TKLC). There were many more "gems" in his basket, but for simplicity and for reasons described below, I will pick on Tekelec. We bought 1,500 shares of Tekelec at $22.125. During the months following October, I regularly (read: daily) checked how we were doing. This is no lie, between October 28th and mid- February, there were only a handful of days that our portfolio beat the category indexes (weighted for small, mid, and large caps). The very typical daily outcome was: on up days we moved up less and on down days we moved down more. As you can imagine, this was a bad pattern.

During this time, I began doing my own research and was introduced to The Motley Fool. By mid-February, I couldn't take any more: we removed 75% of our assets from each of our 35 stocks in Homer's control. This meant that from Tekelec's perspective we sold 1,100 shares at $13.50 (a loss of approximately $10,000 -- with commissions). I thought that with only 25% of our portfolio with Homer I would have greater peace of mind� wrong! By the end of February, I decided to stop the insanity and we removed all of our assets from Homer's control. We sold everything except his three real gems: Sun Microsystems (Nasdaq: SUNW), Applied Materials (Nasdaq: AMAT), and Lowe's (NYSE: LOW), which we still own.

To keep you up to date with Tekelec, we sold the remaining 400 shares at $13.25 (a loss of approximately $4,000 with commissions; total Tekelec loss = $14,000). Thankfully, as a whole, the sales provided us with a minimal short term gain. If we didn't have Sun, Applied Materials, and Lowe's in our portfolio, we would have taken a bath and you would see tears flowing from your monitor. However, when compared to the opportunity cost compared to pure indexing, it makes me ill. I don't even want to think about comparing it to the opportunity cost of investing our portfolio using The Motley Fool's strategies, which I am now currently getting started in.

It gets better. Here is the reason I picked on Tekelec above. About a week ago, Tekelec fell to $7.4375. At this level it had to be a bargain right? It couldn't go lower! So I foolishly bought a small position: 200 shares. At this same time, I started reading The Motley Fool Investment Guide (my opinion: Great Book) and when I got to Part V on small-cap growth stocks I could have kicked myself for not doing any research and just ASSuming that Tekelec was a good buy. I just received ValuTool (my opinion: well worth the $50) from the Fool and plugged in Tekelec's values and became ill again. My only consolation was that it was only 200 shares.

Lessons learned: 1) Keep your money away from the Wise; 2) cheap, low P/E stocks do not equate to good values (no matter where you get in, you can always go down 100%); 3) learn how to do research on stocks and "Just Do It!"; and 4) be patient and never buy on impulse (I am very pleased with myself that I did not even consider buying eMeringue).

[Got a painful investment story and want to commiserate with other Fools? Post it on the My Dumbest Investment board.]

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