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How Not to Invest
Big Losses Make for Big Lessons
We’ve all made stupid financial decisions. Think how much worse you’d feel, though, if yours made the headlines and measured not in hundreds or thousands of dollars but in billions. That’s the premise of the 10 stories Stephen L. Weiss tells in The Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors.
Take Aubrey McClendon, who borrowed heavily to buy shares of Chesapeake Energy — his own company — expecting a huge profit to pay back that debt. What he didn’t anticipate were margin calls, which forced him to sell just about everything at a horrific loss. “Too much leverage, too little diversity,” Weiss tells us as he explains not only what went wrong but also why and how.
It can be easy to convince yourself an investment is a guaranteed winner after a little bit of due diligence, especially if you already have a history with the company, as private equity investor David Bonderman did with Washington Mutual. When research time grew short, he made a gut call based heavily on his long relationships with the company and its CEO. Five months later, WaMu failed and Bonderman found himself the owner of a multibillion-dollar mistake.
It isn’t so hard to guess the lesson Weiss wants us to learn from these sorry scenarios. “Although these mistakes were committed by extremely successful and well-known pros,” he says, “they are common, garden-variety investment mistakes — the same garden-variety mistakes average, everyday retail investors make. Only the scale is different.”
Weiss makes it easy to absorb his advice through a detailed discussion of what went wrong for each investor as well as a Lessons Learned summary at the end of every chapter. I found the educational value for smaller investors a harder sell in some of the stories, but even without a deep behavioral connection, you might pick up something through these unforgettable examples of hubris, shortsightedness and bad timing.
The author starts with a brief biography and professional history of each subject, then follows with some rather brutal postmortem analysis of the mistakes. I appreciate how Weiss treats his profile subjects with respect when he could easily have held up their public failings for ridicule or scorn. By the time I finished reading, I also deeply admired his subjects’ candor and generosity in sharing their stories.
These are not only cautionary tales but also stories that relate the personal losses that accompany financial devastation. Maybe hardest to read was the chapter on investors scammed by Bernard Madoff, including people such as Norma Hill, who invested with his firm as a young widow and eventually lost $2.4 million.
But Weiss ends everything on a humorous note with an epilogue devoted to how he deals with his own money mistakes. His No. 1 rule? Never forget those mistakes! And if you follow the advice throughout his book, you’re not likely to forget yours now, either.
Angele McQuade is the author of two books, including Investment Clubs for Dummies. You can find her online at angelemcquade.com.