How to Lose It All

We've all made investing mistakes. And we'll make more. Either we'll overestimate growth, or we'll underestimate cash flows, or we'll fail to recognize poor management when we see it. None of these flubs can ever be completely averted. To err is indeed human.

The wrong mistakes
But there is a difference between mistakes based on a sound intellectual framework and those based on a wing and a prayer. During the bubble, too many of us did the latter and lost. A lot.

We had the wrong approach. And in "we" I'm including yours truly, as well as the head honchos here at Fool.com, David and Tom Gardner. The brothers Fool have been refreshingly honest about their mistakes in both investing and nurturing the business of Fooldom. A good number of them were outlined in the 2002 book The Motley Fool's What to Do With Your Money Now. Four, however, really struck me. In their words:

  1. We were impatient.
  2. We didn't play our game.
  3. We didn't respect profitability ... enough.
  4. We pursued growth at any cost.

You bought what?!
Sounds devastating, doesn't it? Yeah, it does. And it would make for a severe indictment of the Fool if most of us didn't do exactly the same thing. Still, mistakes are mistakes, and here's what David and Tom had to say about each in the book:

On impatience: "With so many indiscriminate buyers simply wanting in [on Palm's (Nasdaq: PALM  ) IPO in March 2000], perhaps it's not surprising that just a month later the Nasdaq Composite began what would represent a greater than 60% decline over the succeeding 18 months. ... Now, who do you think was doing this indiscriminate buying? The answer is that most of us were. While we two brothers didn't ever own any Palm, David paid a pretty penny once for @Home (later "Excite@Home," David recalls with a shudder) and Tom held his Yahoo! (Nasdaq: YHOO  ) up to $237 and back down again (much further down than up)."

My response: I sympathize. Heck, I bought Sun Microsystems (Nasdaq: SUNW  ) on hype, held it for a 20-bagger, and then, of course, let it get away.

On playing their game: "Yet even as we were trying to teach this lesson (to a biker who gave away home-field advantage by forgoing Harley-Davidson to invest in an unknown restaurant stock), there we were two years ago with one of our real-money portfolios investing in JDS Uniphase (Nasdaq: JDSU  ) . Of all the technology companies, one that was building optical networks using the speed of light to transfer data seemed like the best future opportunity one could find. ... [Yet] even as we're teaching the Harley lesson we must admit that if you dropped a heap of JDS Uniphase products in our lap -- sans brand names -- we would have real difficulty telling you what they were."

My response: I didn't know a front loader from a backhoe before my oldest son was born. Yet we had a small position in Caterpillar (NYSE: CAT  ) in my wife's account. Duh.

On respecting profitability: "Now we're seeing the fallout of those two models (pre-IPO profitability vs. purposefully burning cash to achieve scale). As of this writing, eBay (Nasdaq: EBAY  ) is valued at $15 billion, its stock having risen 22% in the past 12 months. Amazon.com, on the other hand, is today valued at just $4.7 billion, one-third of eBay. [Editors note: It is still about one-third, though Amazon.com comes in at $18 billion, while eBay goes for $50 billion.] Step back and look at how the Internet has shaped up, realizing that the same truth applies to just about every industry that matures: In the end, only a handful of sustainable success stories emerge in any boom era."

My response: Why oh why did I buy Amazon.com after seeing Jeff Bezos on the cover of Time? Yeesh.

On pursuing growth at any cost: "Because its financial statements looked like a mini-GE, a small dynamo ready to spit fire in every competitive direction, we ascribed to Yahoo! the same mind-set as [a company run by] Jack Welch. (The numbers looked just as good!) But the reality is that if you base your conviction on every company having a Jack Welch and thinking like Jack Welch, maybe you would pay the same premium to own their stock. But every company does not."

My response (and a sarcasm alert):What?! Scott McNealy, CEO of Sun, played golf with Welch! I want my money back!

The courage to do opposite
Now, what do you think would happen if you reversed each of these mistakes? Wouldn't it start to look like a smart investing philosophy? Have a look:

  1. I will be patient.
  2. I will buy stock only in businesses I know or would be interested to learn about.
  3. I will respect profitability, especially when investing in firms that have yet to achieve it.
  4. I will endeavor to buy growth cheaply.

Embrace value
If you're already following these principles, congratulations! Not only are you a Fool, but you're also probably a very successful value investor. But what if you've got no idea what I'm talking about? What if all you know is that you'd like to amp up your returns, and that this approach seems to fit with your idea of money management? Glad you asked.

Philip Durell, chief advisor for Motley Fool Inside Value, began at the Fool as a valued contributor to our Foolish Collective discussion board covering analysis and valuation. He's internalized all the lessons we've laid bare here, combined it with 30 years of business experience, and molded it all into a very successful stock-picking strategy. Indeed, his selections for Inside Value have bested the market by nearly six percentage points as I write. Take a free trial today and you'll get access to more than a dozen simple-to-use investing lessons and all 28 of Philip's buy reports. It's risk-free, so all you have to lose is the prospect of better returns.

Look, mistakes happen. I've made them, David and Tom have made them, and you have, too. But we can learn from our gaffes and demand better of our portfolios and ourselves. It all starts with being smarter about buying growth and spotting stocks on sale. In fact, even if that's all we do, we should never again have to worry about losing it all when investing for market-beating returns. When it comes to stocks, that's about as good as it gets.

Fool contributorTim Beyersrespects all kinds of growth, but his children's growth most of all. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which ishere. eBay, Amazon.com, and Palm are Motley Fool Stock Advisor recommendations. The Motley Fool has an ironcladdisclosure policy.


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