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On June 4, 2002, I made the best money-losing investment of my life. On that date, I invested $2,988 to buy 100 shares of General Electric (NYSE: GE ) stock. Nearly a decade later, those same hundred shares would only fetch me $1,915 if I were to sell them. Even adding in the $815 in dividends I've earned on those shares over the years, I'm still down $258 on that investment -- a money loser, no matter how you slice it.
Still, despite that financial loss, I'm extremely proud of my GE investment and am absolutely thrilled that I bought those shares. In fact, it was the best money-losing investment I've ever made.
Financial independence day
You see, GE was the first individual stock I had ever bought in my IRA. It was based on my own research and independent of the broker that had controlled my investments previously. It was with that purchase that I made the ultimate leap of financial faith -- trusting myself not only to invest my own money, but to invest for my own retirement, too.
All investing involves risk, but retirement investing in an IRA adds an extra set of risk to the equation. After all, there's only so much you can sock away in an IRA each year, and if you lose it, it's gone for good. Plus, when it comes to retirement, the alternative to investing well is to either work until you drop or to live on the minimum-wage lifestyle that you're likely to get from Social Security.
Neither of those alternatives seemed appealing to me, and at the time, I was scared out of my wits about messing it up. I was so scared, in fact, that GE was about the only stock I was willing to buy as that initial foray into independent retirement investing. And even though I'm down on that investment nearly 10 years later, what I learned from it is worth far more than the few hundred dollars more I would have had if I had just held on to the cash.
More than just some stock to buy, that GE purchase served as a foundation of an ultimately successful investing strategy -- even though that particular pick didn't work out as expected.
Balance sheet strength
One of the things that attracted me to GE at the time was the fact that it held a coveted AAA debt rating. While it has since lost that designation, the fortress-like security of the company's balance sheet helped me sleep at night, even after having taken my retirement into my own hands.
In a topsy-turvy market and economy like what we've been living through the past few years, there's an incredible sleep-at-night benefit that comes from owning companies with solid balance sheets. And that's part of the reason that both Johnson & Johnson (NYSE: JNJ ) and Microsoft (Nasdaq: MSFT ) also made their way into my portfolio. They're both surviving members of the AAA ratings club, and they combine strong balance sheets with solid business lines to be great sleep-at-night investments.
Of course, neither Microsoft nor Johnson & Johnson are expected to set the world on fire. Johnson & Johnson is expected to grow at about 6% over the next five years, and Microsoft at 9.4% over the same time period. But when you're more concerned about a return of your capital than a return on your capital, a top-rated balance sheet matters more than the mere possibility of rapid growth.
Another thing that attracted me to GE was its dividend. At the time, the company had a better-than-30-year history of raising its dividend, actively and tangibly rewarding its shareholders for the risks they took in owning the company. While the recent financial crisis forced GE to cut its dividend, it has since started aggressively rebuilding that payment as its own condition has stabilized.
That focus on dividend growth led me to pipeline giant Kinder Morgan Management (NYSE: KMR ) . Its rising payout and the equivalent of an automatically reinvested dividend has enabled some incredible returns. Not bad for a company that started its life as an Enron castoff and whose complex corporate structure tends to keep all but the most determined investors at bay.
Diversification saved the company
The final point about the company that led me to take that leap of investing faith was the fact that its business is pretty well diversified on its own. While such internal diversification leads to talk of a "conglomerate discount," there are benefits to such diversification. For instance, there's no doubt in my mind that the cash-generating industrial side of GE saved the overall company when its financial arm collapsed amid the subprime housing mess.
As it saved GE, a similar focus on diversification saved my own portfolio during the financial meltdown. Many banks looked incredibly attractive based on their published financial statements and then-market prices, even as the garbage loans on their balance sheets were tearing the banks apart from the inside.
Bank of America (NYSE: BAC ) , more than almost any other bank, looked like a survivor -- and one worth investing more in -- as the financial world fell apart. Yet by that point, I was already invested more than enough in financials, so I held off buying more -- to protect myself if the worst came to pass within the industry, which it pretty much did.
While Bank of America did survive, its subsequent purchases of CountryWide and Merrill Lynch thrust it right into the heart of the crisis. Had I not held off buying more instead of blocking myself due to diversification, I likely would have wound up selling in disgust near the lows, furious at the company's choice to throw itself into the middle of such a disaster.
Losing pick, winning strategy
All in all, while I've lost money so far while owning GE, I'm thrilled with the overall success of the investing strategy it inspired. Strong balance sheets, rising dividends, and diversification pulled our portfolio through the last several years of insanity, and I fully expect the strategy to continue working for years to come.
If only all my money-losing investments turned out this well...