Be a Better Investor – Trust the Market

It was late 1988 and I wanted to begin building my investment empire. At the time, I worked in the back office of one of the big financial services wirehouses processing account transfers (exciting!). In our building there was one computer set up in the middle of the floor for stock quotes. A Quotron machine. No, not a Bloomberg machine, Bloomberg was in its infancy back then. Quotron was THE company to get financial information from in the 70’s and 80’s until, well, they weren’t. Competition did them in (Future blog entry on the rationale for diversification). Every time I walked by the Quotron, I’d check the stocks that I was tracking. One of them was a company called CityFed Financial.  I did my banking with their subsidiary City Federal Savings & Loan in central NJ and thought it would be a great place to start building my portfolio.  Buy what you know, right?

So I moseyed down to the local branch of the wirehouse to meet with the broker who I had contacted on the phone.  I told him I wanted to open an account to buy CityFed.  I filled out the application and wrote him a check.  I told him that I’d been tracking the stock, and asked him if he knew why it had dropped so much over the last few weeks. If I recall it was around $3 a share, down from loftier levels. The broker told me something about the bank not being able to meet its capital requirements, which I assumed was a temporary blip. After all  this was supposed to be one of the largest savings & loans east of the Mississippi. It had to be a blip. Yes, we were in the midst of the savings and loan crisis, but I didn’t know or care much about that.  As far as I knew, the bank was operating fine, and $3 was cheaper than $10, so I plunked down $300 and bought some shares. I planned to wait until it got back up to the 7-10 range and then sell it for some quick and meaty profits.

A few weeks went by and it wasn’t going up, it was in fact going in the opposite direction down to a dollar and change. So I bought more with another deposit of $100. I was making $16,000 a year at the time, so this was some substantial jing that I was laying out, and I was also trying to save a few dollar to buy one of those sweet 240SX’s that Nissan had coming onto the market (I eventually bought one, but sold it after less than a year because I didn’t like having a car payment. Future blog on the best ways to flush money down the drain.).  Now my average price was even lower, so when it went back up to $10 my profits would be even meatier. I could taste it, and the possibility of getting my car sooner was looking really good.

A few weeks later the stock was trading for around 12 1/2 cents. Yes, an 1/8 of a dollar. I finally did some research and learned about the formation of the Resolution Trust Company (RTC) and how it was set up to take over failing savings and loans. And of course, the RTC had its sights set on CityFed.  I went to talk to “my broker” about averaging down- buying more shares at a lower price so my overall cost was lower. Could the stock come back even though it was mired in this RTC stuff?  I remember his response to this day, which was, “Of course, anything can happen”. Remember the scene in Dumb & Dumber (1994) where  Lloyd (Jim Carey) is talking to Mary (Lauren Holly),  and his response after she tells him there’s a 1 in a million chance of the two of them getting together?  “So you’re telling me there’s a chance”.

That was me, I was Lloyd. I heard what I wanted to hear.  I figured there’s a chance it could recover, and when it did I needed my cost basis to be lower than it was so I could bank my profit. I bought more at an 1/8. I think I had more than 1000 shares by then. I had no buyer’s remorse or concerns. I was certain the stock would go even higher even with the financial issues they were having. The prospects of huge profits gave me a twinge of excitement – I thought I was the Gordon Gecko of central Jersey.

I’ll make a long story short and quote another movie line, the company “crashed and burned”, and the stock wound up not being worth the paper it was printed on (Yes, I actually had physical certificates). I licked my wounds and moved on. Did I ever make investing mistakes again? Of course I did. The Dot Com bubble was on the horizon and I was not immune to the sirens call of fast moving tech stocks.  But with every blunder,  I learned a little more and never made the same mistake twice.

What stuck with me all these years is that I should have trusted the market. The price of the stock was telling me something. Did I really think that I knew anything more than the 1000’s of people trading the stock who thought it was worth 12 cents? The price is the price because there’s a lot of information in the market, and there’s a lot of people leveraging that same information making decisions about a company’s prospects and placing a value on the company based on that information. Had I trusted the price, it would have eliminated me trusting the person who I viewed as the expert – “my broker”. My Dumb & Dumber impersonation caused me to take everything he said with a positive view, and since he got paid on commission and my trades were directed by me, he had no reason to tell me I was acting like Lloyd. Lesson learned.