by Clark Davis
There are errors and there are mistakes. And then there are really stupid mistakes. Here's one I made many years ago.
I don't know how it came about that I had an extra $500 handy. In those days, it certainly wasn't typical of my budget to have anything left over at the end of any month.
I was managing investments for a multi-bank trust company. Perhaps it was all those very conservative investments that I dealt with day in and day out that caused my alter ego to emerge and want to speculate on a practically unknown over-the-counter stock. Maybe it was just plain greed.
The Wall Street whisper mill was spreading a story about a little company that was opening outpatient surgery centers around the country and the incredible earnings growth the company was about to experience. It was the kind of talk Wall Street bandied about every day, but for some reason, this time it caught my fancy, maybe because the stock was selling at 15/16ths. That meant I could buy 500 shares with my budget surprise $500.
I called my favorite broker and bought the 500 shares.
The stock started gradually moving up; the rumor mill was heating up and expectations began rising. A period of calm ensued and then the rumor mill really started moving the stock. "I hear they'll triple their earnings in the next two years." The heat turned up. "I hear they're getting the attention of the institutions." At this point it's at a boil, but wait here comes a rolling boil: "So and so told me that he heard from a friend who knows the company that they are going to be taken over."
Wow, now it is really getting exciting. My 500 shares are trading in the low teens, and I have victory within my grasp. Except I don't know what victory will be. I mean, where's the finish line? At what price is the stock likely to run out of steam?
Let's step back a minute. The company was spending money left and right establishing new centers. Earnings? They were expected to be realized when the expansion phase was completed. Dividends? You gotta be kidding. Quality of management? The best management was whatever public relations or rumor department was working for them.
What you had here was not a Cool Hand Luke "failure to communicate." It was too much communication by too many people with high hopes and more than a modicum of greed. I, the conservative money manager, was stepping outside my discipline and entering the world of price momentum investing and I was loving it. Often it was the most exciting part of an otherwise routine day.
Now the stock is at $19.50 a share! My $500 is just shy of becoming $10,000! Now I have my goal, my finish line, my victory. I call my broker. "Dennis, I want to sell it all at $20 GTC."
"Do you think it's time to get out?"
"For me it is. I will have turned my $500 into $10,000," I said, with visions whirling in my head about writing an article such as, "How I turned the grocery money into a fortune."
You can probably see the rest of this story coming. I didn't sell at $20. It never went higher than where it was when I placed the limit order; instead an insidious decline started when I put the phone back on the cradle. Oh, I did make a very nice profit when I let it go in the low teens. But the profit I earned turned out to be less valuable to me than the lessons I learned.
Here they are:
1. Don't abandon a proven discipline for a whim;
2. Don't abandon your discipline, period;
3. If you get really blood-rushing excited about a chance to make a killing, step back, take a deep breath and a hard look, and tell yourself that you've got a bad case of greed.
4. If you think you can outfox the professional market makers and traders and win the game, you're overworking your ego.
5. Read these rules over and over until you get them through your thick skull.
So, I learned a lot from those mistakes, but it didn't stop me from making others. When I told this story to a prospective client last year, she asked, "If you were that stupid, why should I hire you?" The words popped out of my mouth before my brain had massaged them. "Because in my 30 years in the business I've made just about every damned mistake you could think of."
She hired us.
(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at clark @ slia.com.)
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