Cluelessness Before Foolishness

By Rob Landley (TMF Oak)

AUSTIN, TX (July 2, 1999) -- Tonight, I'm rounding out our week on "When Fools were fools." The single greatest financial mistake I've made so far is getting deeply into debt right out of college. For starters, I managed to buy a used car for the price of a new one. Heck of a deal. They got me for the "extra rust protection" and "extended warranty," plus I financed it at 13%. Not an auspicious start.

Then came credit cards. I avoided the trap of getting a dozen different cards, but two cards maxed out to $5,000 each can still add up to an awful lot of debt. I already had five figures worth of student loans from college, which weren't bad in and of themselves (at least that was debt with a purpose), but they didn't help the total picture. Along the way, I also "financed" some furniture and got another loan to pay for car repairs. (The "extended warranty" doesn't cover collisions.)

I graduated from college and started my first job (at IBM) about four years ago. In that time I've spent about $25,000, twice. Once borrowing money, and once paying it back. I still have a few thousand to go before I'm totally debt free. Not only did I have to spend a lot of the money I was earning to make debt go away, but I lost the ability to invest that money in one of the greatest bull markets in history. I now consider debt to be really, really evil.

This isn't to say I wasn't doing a little saving during this time. Before I found The Motley Fool, I opened up a mutual fund with an automatic $100-per-month deposit straight from my checking account. Some guy at my bank picked the fund, which of course underperformed the S&P 500 index, about which I knew nothing. I also didn't have any sort of long-term investing mindset, and on a couple of occasions I cashed out my savings and spent them, because there was nothing in particular I was saving up for.

The one financially sound move I made during my first two years out of college was to max out my 401(k) contributions. I noticed that I didn't really miss money that never made it into my take-home pay, and I liked the idea of "employer matching funds. In addition, the 401(k) plan's Web page had a nice little blurb about "tax deferred growth" that made it sound like a good idea. Besides, saving for retirement seemed pretty darn necessary. Does anybody under age 30 honestly believe Social Security will still exist in forty years?

But even my 401(k) was remarkably mismanaged -- by me. I avoided the best option (the pure IBM stock fund) and only put a little in the S&P 500 fund. I spread a little into a small-cap fund, and some more into an "international fund" that actually ended up losing money, plus other funds I can't even remember. I tracked the funds' one-year and three-year results rather than having a clue what they were doing with the money. Plus, I had no benchmark to judge my results against, anyway.

Then one day, quite by accident, I found The Fool. I was Web surfing after work, typing in words to see what sites came up. Fruit.com turned out to be Fruit of the Loom underwear. There was no "www.fruitbat.com" at the time, or "www.ukelele.com." Potato.com gave a "this site under construction" message, and "www.fool.com" turned out to be a website that looked vaguely familiar...

Hadn't I heard about these guys? Didn't Newsweek or somebody do a cover story on two brothers who had the best performing publicly tracked investment fund of 1995 or something? The site was a lot simpler back then, and the Fool's School was one of the few things on it, so I wandered in and started reading the 13 Steps to Investing Foolishly, and for the first time, I got a clear explanation of what investing in stocks actually MEANT. I had thought they were just another kind of bond.

I started reading the daily columns, and on May 1, 1997, a Fribble called "Foolish Guide to Simpleton Investing" caught my attention. It sounded like something I could do. It ended with a mention of a "Cash-King investing folder" on their newly opened Web-based message boards. After a bit of rooting around, I found the board in question. Unfortunately, it turned out that the people there knew even less about the subject than I did, and my first post pointed them to the Fribble and my guess as to what all this meant. So I rooted around a bit more and came up with the e-mail address of this "Tom Gardner" person from the original Fribble, and bugged him to come tell us what the heck he was talking about.

The rest, as they say, is history. You can go back and read for yourself the first few messages of what these days is called the Rule Maker Strategy board. My first post is #7, former portfolio manager Al Levit started discussing portfolio allocation in post #15, Tom Gardner himself showed up in #18, Phil Weiss (TMFGrape, posting as MrShihTzu) wandered in for post #80. Our most recent recruit, Matt Richey (TMFVerve, formerly Matt4Vols), first showed up in the board with post #5022.

The Fool is what sparked my interest in stocks, and, as such, I've had pretty good guidance for avoiding the more obviously stupid mistakes in the stock market. I've had a few semi-speculative investments go south on me, such as the 100 shares of Super Vision (Nasdaq: SUPVA) which I bought at $8/share and sold for $5/share. Then, there was the 10 shares of Amazon.com (Nasdaq: AMZN) that I still own, which I bought the week before the recent 50% drop. But, I've never invested more than I could comfortably afford to lose. Also, I've never bought stock on a broker's recommendation or paid any attention when an analyst downgrades a stock from "buy" to "accumulate" -- whatever that means.

Probably the best lesson I've learned from The Fool is the ability to watch a stock shoot sky high and not hock the cat and go on margin to "jump on board." If I don't understand it, if I can't afford it, or if I'm just not comfortable with it, I'm not going to invest. Period. So far, the majority of my investments have been well-researched, healthy companies like Coca-Cola, Dell, IBM, Intel, and Wrigley, and there are a dozen more that I admire greatly but simply don't own any of yet.

Am I being too timid? Possibly. Some day I hope to have more money to risk on high flyers like AOL, Amazon, and Yahoo!, but first I'm getting the rest of the way out of debt. One boneheaded catastrophe at a time, I think.

Here are a few links for fools trying to become Fools:

- Oak

07/02/99 Close

Stock Change    Bid
AXP   +4 1/2    137.63
CHV   -  1/16    96.25
CSCO  +2 11/16   67.06
EK    +  7/8     70.56
GM    +1         68.63
GPS   -  1/8     49.88
INTC  +  5/8     63.50
KO    -  1/16    64.81
MSFT  +  13/16   92.00
PFE   +1 1/8     38.63
SGP   +  9/16    54.50
TROW  +  13/16   39.94
XON   +1 1/16    79.50
YHOO  +  3/4    178.13

                  Day     Month  Year    History
        R-MAKER  +1.50%   3.46%  17.68%  48.91%
        S&P:     +0.74%   1.35%  13.76%  40.68%
        NASDAQ:  +1.29%   2.06%  25.01%  65.83%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     92.00   135.09%
   6/23/98   68 Cisco Syst    29.21     67.06   129.63%
    5/1/98 82.5 Gap Inc.      22.91     49.88   117.67%
   2/13/98   44 Intel         42.34     63.50    49.99%
   2/17/99   16 Yahoo Inc.   126.31    178.13    41.02%
    2/3/98   66 Pfizer        27.43     38.63    40.80%
   5/26/98   18 AmExpress    104.07    137.63    32.25%
    2/6/98   56 T. Rowe Pr    33.67     39.94    18.60%
   8/21/98   44 Schering-P    47.99     54.50    13.56%
   2/27/98   27 Coca-Cola     69.11     64.81    -6.21%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     79.50    23.57%
   3/12/98   15 Chevron       83.34     96.25    15.49%
   3/12/98   20 Eastman Ko    63.15     70.56    11.74%
   3/12/98   17 General Mo    72.41     68.63    -5.22%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
   6/23/98   68 Cisco Syst  1985.95   4560.25  $2574.30
    2/3/98   48 Microsoft   1878.45   4416.00  $2537.55
    5/1/98 82.5 Gap Inc.    1890.33   4114.69  $2224.36
   2/13/98   44 Intel       1862.83   2794.00   $931.17
   2/17/99   16 Yahoo Inc.  2020.95   2850.00   $829.05
    2/3/98   66 Pfizer      1810.58   2549.25   $738.67
   5/26/98   18 AmExpress   1873.20   2477.25   $604.05
    2/6/98   56 T. Rowe Pr  1885.70   2236.50   $350.80
   8/21/98   44 Schering-P   2111.7   2398.00   $286.30
   2/27/98   27 Coca-Cola   1865.89   1749.94  -$115.95

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1590.00   $303.30
   3/12/98   15 Chevron     1250.14   1443.75   $193.61
   3/12/98   20 Eastman Ko  1262.95   1411.25   $148.30
   3/12/98   17 General Mo  1230.89   1166.63   -$64.27

                              CASH     $70.09
                             TOTAL  $35827.59

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.

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