Following the Herd to My Worst Investment Ever
July 09, 2013Back in early 1999, as Internet stocks were all the rage, I invested that year’s Roth IRA into the Putnam New Opportunities Fund, which had double digit returns for their 1 and 3 year historical performance. Now, I know past returns don’t indicate future performance, and I also had that little voice in the back of my mind that was saying it was too good to be true, BUT the Putnam wholesaler had recently visited my office and was saying how hot the fund was, and as a broker myself, I was able to buy in at NAV, meaning I didn’t have to pay the front end sales charge. I couldn’t resist.
Of course, by mid-2000 the Internet bubble burst, and I lost 70% of the value of my Roth IRA by the time I rode it all the way down to the low point in 2002. The fund had such an outflow of money and poor reviews for several years, I think that’s why Putnam ultimately changed the name to the Multi-Cap Growth Fund. But by that time, I’d already bailed out what was left of my funds. To add to the list of why this was my worst investment ever, I couldn’t even take the loss as a tax benefit since capital losses in Roth IRAs can’t be recognized as a tax write-off. If only I’d followed a few of the tips provided by CNNMoney.com, including their lesson 8 (don’t chase short-term winners) and lesson 10 (don’t be too quick to dump a fund), I wouldn’t have made this mistake.
I’m hoping my best investment yet will continue to be a moneymaker. I bought some investment real estate AFTER the bubble burst during the 2007 real estate meltdown. What had been a half million dollar luxury condo in 2005 was mine in 2009 for the price of a luxury car as the winning bid for a foreclosure property. In just 4 years, the market value has doubled, and the carrying costs are covered by just a few months of rent during the spring to reliable Canadian snowbirds seeking fun in the sun. The lessons I followed when purchasing this hidden gem included the standard mantra of real estate (LOCATION, LOCATION, LOCATION!) and calculating that the monthly rent I could fetch would be at least equivalent to 1% of the purchase price and that the estimated yearly rental income would at least cover the carrying costs of the property at a bare minimum. Not only does this investment look good on paper, but it sure is fun to stay in, too!
Both my best and worst investments have been on either side of a bubble, and now I truly understand what Warren Buffett meant when he said “be fearful when others are greedy and be greedy only when others are fearful.” As a value investor, Buffett has many other insightful quotes, including “you can’t buy what is popular and do well.” So don’t follow the herd and instead do your own research to find your hidden gem at a sensible price with the thought of holding it for the long term.