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The Best Losing Investment I've Ever Made

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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.

Growing dividends
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...

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America, Microsoft, General Electric, Kinder Morgan Management, and Johnson & Johnson. Click here to see his holdings and a short bio.

The Motley Fool owns shares of Microsoft, Bank of America, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Microsoft and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson and a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2012, at 11:39 AM, IlanBigfoot wrote:

    Certainly one of the braver headlines I've read. But the lessons learned seem peripheral to the investment in GE itself. Was it just bad luck that this part of your investing strategy of strong balance sheets, rising dividends, and diversification didn't perform? Or is there some deeper reason?

    Thanks for the article.

  • Report this Comment On February 22, 2012, at 11:41 AM, mwm102 wrote:

    I can relate! I took over my IRA in September. GE was one of the stocks I purchased but at a much better price! It feels good to make money and not be paying funds to loose money for me!

  • Report this Comment On February 22, 2012, at 11:48 AM, EnigmaDude wrote:

    Just hang onto those GE shares for another 10 years and you will be writing about one of the best investments you ever made, period.

  • Report this Comment On February 22, 2012, at 1:17 PM, Hawmps wrote:

    "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." (my emphasis added)

    This is a very powerful statement. KNOW your investment thesis BEFORE you turn loose of your cash.

  • Report this Comment On February 22, 2012, at 1:36 PM, Mega wrote:

    You would have been better off ignoring credit ratings and deciding for yourself whether GE had an "AAA" balance sheet. Then maybe you would not have lost money.

  • Report this Comment On February 22, 2012, at 3:37 PM, sikiliza wrote:

    "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."

    If you can explain to me how GE makes money, then I will agree with this statement. See, when you picked GE, the economy was still rosy and the nuts and bolts were not essential to your decision-making.

    I also owned GE a few years ago but I got in after the Financial Crisis so I made out like a bandit.

    That said, GE to me is a Mutual Fund and I would rather diversify across all of its different industries by picking individual winners out there than have GE management do that for me.

    Question: Would you invest in GE now?

  • Report this Comment On February 22, 2012, at 3:38 PM, wordjunkie wrote:

    Sorry, but I fail to see what "lesson" was learned. Sounds to me like you simply bought a bad stock and then bought a bunch more just like it.

  • Report this Comment On February 22, 2012, at 3:44 PM, MichaelDSimms wrote:

    Sadly GE got caught up in the greed of the big financial centers. They were duped like so many others. I have recently purchased 500 shares myself and expect the company to return back to it's core business and make good profits. They are highly diversified, pay a decent dividend and are a well run company.

  • Report this Comment On February 22, 2012, at 11:19 PM, TMFBigFrog wrote:

    Hi Fools --

    Hindsight is 20/20, and if I had known in 2002 that I'd be down money in 2012, I wouldn't have made that particular investment then. Then again, if I had such strong foresight, I'd be richer than Buffett...

    I'm still very glad that I bought GE when I did, as it helped me cement the importance of dividends, value, and diversification in my own portfolio -- three guideposts that have served me well and that have led to an overall successful portfolio, in spite of some less than ideal investments.

    As for whether I'd buy GE now... Well, I own the shares, and I'd rather be a buyer at $19 than at $29. The company still has a strong balance sheet, still has strong core businesses, and has resumed increasing its dividend after it faltered. That said, I still believe in diversification and am not increasing my GE position, though I wish I had when the stock was in single digits near the bottom of the market.

    Regards,

    -Chuck

    Inside Value Home Fool

    Disclosure: I own shares of GE.

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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