June 12, 2014

paul

Dear Friends,

I just returned from a wonderful trip to Italy with my wife, Zan. We started with an independent 5-days on the island of Sardinia with its beautiful beaches, mountains, hillside villages, wild flowers, people, and tasty food and wine.

Afterward, we joined a Tauck tour in Rome and sailed down the Amalfi coast to Siciily, ending in Malta.  We had not been on a small boat cruise (60 guests and 30 staff), but will do it again; and we heartily recommend Tauck.

Courtesy of Tauck Tours

I had the pleasure of talking with fellow passengers who were either retired or about to retire. One fellow, a successful businessman, shared stories that were entertaining but sad, about how he had never made any money in the market.

In one case, he invested a sizable amount of money in Washington Mutual. He had friends who knew a lot about the company and, at $3 a share, he knew it couldn’t go lower. The bad news: he was right. Within a short period of time he doubled his money, sold his shares for $6 each and couldn’t believe how easy it was. I suspect he told all his friends about his shrewd move.

When the stock went back to $3, ($3 was as low as WAMU could go), he took all the proceeds from the first sale, plus some new money, and sat back to rake in the bucks. Well, you know the rest of the story. He lost it all!  And his feeling from this experience, and many like it, led him to conclude that you can’t make money in the market.

Mistakes? He likes to take information from folks “in the know.” He probably knew many of the officers and directors at WAMU. His conclusion that a stock couldn’t go lower implies he thought he knew more than the market. His decision to do it again is common among investors who think their past experience has anything to do with the future.

He asked me to give him the name of an individual stock I could recommend if he invested $1 million. I took the bait and suggested a small cap value ETF or index fund. I could tell by his response that he was hoping I knew of another WAMU that could go from $3 to $6, but wouldn’t go from $3 to zero.

Although this man can afford to lose a million dollars and not change his lifestyle, most investors can’t afford to make that kind of mistake. His terrible stock market experiences (I only shared one of three similar results) are not uncommon for investors who chase the elusive “sure thing.”

I didn’t want to ask too many questions, as he was so forthcoming in his comments, but I’d bet that he told lots of his friends about his $3-to-$6 experience, and they invested with him when he went back in for the next double.

I’m sure my readers get the lesson from this true story, and that is to ignore the advice of amateurs, and particularly amateurs who think they know more than the market.

Along the same line, I hope you will listen to my podcast about the importance of finding a good mentor. I have never made a major business or investment decision without checking with my mentors. By the way, many of my mentors don’t even realize I rely on their guidance.

I hope you have some wonderful summer adventures and enjoy peace of mind that you are invested wisely – that is, diversely and for the long term. See my recommendations under “Resources” at paulmerriman.com

To Your Success,
Paul

 

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