Making Investing Hard is Expensive
Today I want to teach three lessons I learned about investing in the last century. These lessons help explain why I want to teach others how to invest and make their own investment decisions. If you make investing hard to do, it will be expensive.
I have worked with and talked with many brokers over the years. My first conversation with a broker was in Milwaukee. James was a bright young man, and he was very expensive. He was an expensive lesson. His trades were expensive because each trade had a large commission I paid for each trade. But even more expensive was his advice. His suggestion to purchase shares of Lernout & Hauspie Speech was extremely expensive. The shares were quickly worthless. His advice to buy shares of HA-LO Industries was just as bad. They also became worthless.
Sadly, many “advisors” and “professionals” are not giving good advice and they are not, in my opinion, professional. That is, many brokers are not qualified, skilled experts. They may have passed various exams and may even be fiduciaries, but they also have some serious blind spots and biases that can be harmful for the long-term investor.
A Lesson From the Last Century
I was born midway through the last century. In fact, today is my birthday. I spent more time in the 20th century than I am likely to spend in the 21st century. But I learned some important lessons in the first 50 years.
One lesson came when the company I worked for gave me stock options. Those options were handled by a Milwaukee broker. That broker helped me sell my shares of the company stock and then gave me advice and suggestions for diversification. In fairness, some of his suggestions were good. However, in hindsight, most of what he did was expensive foolishness. The good news is that I spent $7,386.25 to get an education. In other words, I used up 37% of the money I had received from the sale of my company stock, to lose money in the stock market and learn three important lessons.
Bear in mind that $7,386.25 in 1999 would be worth much more now if you factor in inflation. Learn from my mistakes. Please don’t make the same ones.
Lesson Number One: Free is Not Free
If the broker presents an idea that is just too good to be true, it is too good to be true. For the purchase of HMK and LHSP, he offered to sell me shares with no commission. Back in the 1990’s commissions were expensive. So it was like he was giving me pizza with no delivery charge. However, the trades were an expensive pizza, as the value of the shares of both companies went to zero. I lost my entire $7,386.25 investment. Think of it this way, my commission was $7,386.25. Please note that the broker lost nothing, other than my respect.
But it is far worse than that. I lost an opportunity to put $7,386.25 to work to grow over the last 23 years. I am grateful, however, for the education. It caused me to want to learn how to invest so I did not have to continue to pay someone to make mistakes for me.
Lesson Number Two: Diversification Matters
It should be obvious to even a novice investor that putting 37% of your investing dollars into two speculative companies is insanity. In other words, I invested 16 percent of my portfolio in HMK. I would never do that today. The maximum I want to see on any single investment is 5%. To make this lesson even more painfully obvious, I invested 21 percent of our assets in LHSP. That is just plain dumb. The broker was giving me terrible advice.
You can make this same mistake by buying the wrong ETFs and mutual funds. A prudent investor knows the top ten investments in the funds they buy, the expense ratios, the dividend yield, the dividend growth, and the total number of companies in each fund.
Lesson Number Three: Dividend Growth Matters
If you look at my purchase of HMK and LHSP, you will see that neither of them paid a dividend. I did not even know there was such a thing as “dividend growth.” My broker never talked about it. Furthermore, the P/E ratio for HMK was ridiculously high. The fact that LHSP did not have a P/E ratio is also very telling. “N/A” means that LHSP did not have earnings. Their Price/Earnings ratio did not exist because they had no earnings.
When investing, dividends do matter, and dividend growth is the best way to build your wealth and increase your income over time.
Keeping It Simple
When I teach a teenager the basics of investing, I hope they learn some investing terms, concepts, and key principles. The principles include how I determine if an investment is a quality long-term investment, how to keep investing costs low or zero, how to diversify into a broad range of good dividend growth stocks (or ETFs), and how to respond to bear markets and recessions. If you want to learn, I am ready to teach.
One word of caution: don’t assume you have to rely on a professional for expert advice. Buying investments is like baking a cake. It isn’t hard if you have the right ingredients and follow the recipe.
Cindie and I still own shares of Pfizer (PFE). However, I am thinking about reducing our investment in that company. Our largest investment is an ETF with the ticker symbol VYM. HMK and LHSP would not have been chosen by the VYM managers for a good long-term investment.
Thank you Wayne for all you have done and are continuing to do. You are an amazing person to take the time to teach us novice investors on how to get the most out of hard earned money.
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