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When Fools Were fools
More Investments Gone Bad

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January 19, 2000

No one's perfect. And that goes for us Fools, too. "When Fools Were fools" is a special feature series where brave Fool employees admit their most unFoolish financial moves. In this third edition, our once unFoolish Fools share some of their worst investing blunders. Hopefully, reading about these not-so-successful investments will help you avoid making the same mistakes.

John Schmidt, Fool UK Techdome
I was just finishing my studies and had already accepted a job offer from a high-tech start-up company. They decided to go public, and the investment bank that was coordinating the offering allowed the employees to purchase the stock at the IPO price! This was great, but I didn't have any money. I was pretty excited and optimistic about the future of the company, and managed to convince my bank, on the strength of my offer letter, to give me a line of credit. I used this capital and 25% margin to buy a lot of IPO stock of this company, which depended almost exclusively on one product and a couple of key clients for its survival.

The offering started off well, and then started to decline a little. "Oh well," I said to myself as I headed off on a two month trip to the Middle East (where I would be nearly impossible to reach). After I returned, I found out that the stock had sunk to within 50 cents of a margin call! I got lucky, and my investment turned out to be not as bad as it could have been. The company did well and I managed to pay off the debt in a little over a year. After discovering Fooldom, though, I went back to review my returns. If I subtracted the interest payments and compared the Return on Investment (ROI) to the market average, I actually underperformed the market. I had undertaken an insane risk (when I should've been studying) for sub-par performance.

David Forrest, Operations
1-900-Trader-Vic. Man, talk about getting hammered six ways to Sunday! There's a dude named Vic Sperandeo out there who goes by the cutesy title "Trader Vic." He has a website, occasionally appears as a guru on CNBC and Barron's and built his reputation making a call on the '87 stock market before it crashed. He's written several books including Methods of a Wall Street Master (humble bloke), and he also had this really cool 1-900 number that you could call up to 5 times a day for $2.95 a minute. Vic would tell you which way the market was going. Not only was I stupid enough to buy into his futures/cash market mumbo-jumbo, but I also actually tried to trade based on some of his recommendations. I lost my shirt! Did I mention that my phone bill typically ran close to $300 a month for the short time I was listening to Vic? What a foolish (notice the small "f") racket he had going.

Justin McKenna, Human Resources
While working for Iridium LLC in 1998, I had no knowledge of the stock market or how it worked. Even though I tracked stocks out of curiosity, I didn't understand valuation, splits, shorting, or the like. So, my purchase of shares in Iridium was based purely on the hype that had already been generated in the market by the Wise, coupled with my own ignorance of the company and its prospects. After hearing two superiors confidently suggest that the stock was going to split "any day now," I frantically raced to purchase some Iridium stock, thinking that stocks split spontaneously, and without warning.

Little did I know that companies announce stock splits, and well ahead of the actual day of the split. It was some time after purchasing the shares that I began to read The Motley Fool, and began to learn how to value a company. I also learned that stocks do not split spontaneously, like amoebae in a petri dish, and they really don't matter anyhow. As the company's stock price declined, my "buy and hold" attitude became moot, and I still don't know what is going to happen to my shares if and when they begin trading again. My lesson: Don't buy into a company with a brand new product until that product has been tested in the market. If I'd followed this lesson with Iridium, I wouldn't have occasion to write here.

Alan Oscroft, Fool UK Editorial
Some years ago, after a number of years of living overseas and saving a reasonable amount of tax-free earnings, I looked for a suitable investment before I was tempted to spend too much of it. At the time, the idea of investing in the stock market was a non-starter. It was just a gamble, one for high-flying (and hard-falling) cowboys, wasn't it? I'd certainly never heard of the Fool, but I guess that's because David and Tom hadn't even got round to Ye Olde Printed Foole yet.

Anyway, coming from Liverpool, a city with a large university, cheap housing, and a shortage of decent student accommodations, I put my money into two houses for letting to students. I had a few good years, but then the university opened two large new residential halls. The bottom fell out of the rental market and I couldn't let any rooms. Time to sell. But woe, all the other landlords had the same idea and property prices started to fall.

I've still got them both, by the way. Anyone fancy a nice holiday home over in the north of England? Going cheap.

Joseph Richardson, Customer Service
I was about 20 when I started work programming games at a little software startup. I got a $2000 bonus for completing a certain job. I had the choice of purchasing an original work of art that I liked or purchasing more stock in this company. I thought the idea of owning part of this company was cool. So I gave the money back to them. That was the last I ever saw of that cash. The company went bankrupt. Oh, and the artwork is probably worth about $10,000 now. Lesson learned: It was a totally emotional decision with no thought given to the management, financial status, or viability of the company. I was caught up in the excitement of the moment. I knew more about that art than I did that company. I should've stuck with what I knew.

Frank Bosley, Customer Service
I started working at my current job (not the Fool, the other one!) in 1986 when I was 18, but was not eligible to participate in the 401(k) plan until I was 21. The company matched 50 cents on the $1 up to 6% of your income. Well, I turned 21 and got the application to join. At last! Only problem was that there were a bunch of different investment options to choose from, and I had no idea which one I should pick. So, I went to the person in my building who seemed to be the most knowledgeable when it came to all this black art of investing stuff.

Keep in mind that this is only about two and a half years after the crash in 1987, and the fellow I went to see had really lost his shirt in that one. To top it off, he was retiring within the year. Anybody have any clue where I am going with this? I asked. He told me that I should make the maximum contribution I could afford, but to invest in a guaranteed income fund that was more or less backed by the U.S. government. Well, his first tidbit of advice was indeed Foolish. Every year, I added half of my raise to my contribution until I finally reached the maximum 16%. His second piece of advice may have been suitable for someone in their 50s, but I was only 21 and had nothing but time on my side! What does this boil down to? The last 10 years have been the greatest bull market run in the history of the stock market, and my 16% (plus employer matching 3%) was sitting in an income fund with an annual return of about 4%.

Well, no use in crying over spilled milk. I discovered The Motley Fool in 1997, and have been Fooling around ever since! I moved my 401(k) portfolio into an S&P Index fund. The lesson here was that you should never take financial advice, no matter how well intentioned, without backing it up with your own research. This includes what you hear here at The Fool!

George Runkle, Community
1991 was a bad year. I had angered the president of the engineering firm I worked for, and he wasn't the forgiving type -- I was "laid off" as punishment in a down economy. Worse yet, and seemingly unrelated, my father died. He had named me as a beneficiary for a small life insurance policy with Metropolitan Life. I contacted them and gave them his death certificate. Weeks went by with no answer -- I was hurting financially. In desperation I called and the agent said he had tried to reach me at my house, but no one had answered the phone (right -- my wife had a home daycare business and was always in.)

The agent came over immediately with the check. In the process he sold me a $100,000 Whole Life policy I couldn't afford, and told me that MetLife had IRAs that I could roll my 401(k) into. The IRA he sold me was a "variable annuity" that underperformed the market (greatly), had extreme fees, and a back-end load. The experience of being taken led me to learn about investing, and ultimately Fooldom. I rolled the "investment" out of the annuity into my own brokerage account, and will never speak to MetLife agents again.

How can you avoid these pitfalls? What should you do before you buy or sell that stock? Visit the Fool's School and learn the basics.



 






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