The payoff: Cut your losses

By Special to MoneySense on September 6, 2012
Estimated reading time: 4 minutes

Losing $2,000 as a rookie investor paved the way for my later success, writes Diane Francis.

The best investment I ever made was also my worst. It cost me $2,000 but I walked away with something far more valuable. I was 20 and jointly owned a profitable commercial art studio in Toronto that always had money in the bank. Reinvesting in equipment and expansion was the priority but I intuitively understood that having all my eggs in one basket was not a good idea. So I hunted for extracurricular opportunities. The studio specialized in creating designs and publications for brokerage firms on Bay Street and, as an immigrant, I couldn’t help noticing that brokers drove fancy cars and wore expensive suits. I assumed they knew how to make money in the stock market so I asked a few brokers if they had any tips as to which stocks to buy. Two of the brokers gave me their “hot tips.” On their advice, I made two $1,000 stock purchases. The names of the public companies I have erased from my memory because of the mental pain they caused. But I recall one built housing while the other made steel, two sectors about which I knew absolutely nothing. After placing these speculative bets I became a faithful reader of the financial pages, only to watch my $2,000 shrink daily. A year later, both were worth half what I had originally paid. I mentioned this to my broker, who hedged his bets by telling me his advice was to sell at a loss, hold or buy more to “average down.” Left to my own devices, I simply clung on until both of my flyers circled the proverbial drain. The experience was upsetting, but baptized me into the world of enlightened investing. It taught me these priceless lessons: ? A “hot tip”—even if true—is illegal if it’s a professed insider tip. But it’s usually nothing more than a way to get suckers like me to buy the stocks of brokers and/or their favourite clients who know enough to get out of the stock. ? Intermediaries are in business for themselves—not for you. If it sounds too good to be true, it probably is, so always look a gift horse in the mouth. ? Never invest in a market or asset class about which you know nothing. Only invest when you know a great deal based on your own independent homework. ? Nothing is guaranteed anytime, anywhere, in anything, even after you have performed all possible due diligence. This means it’s imperative to calculate the risk-reward ratio and, if it’s too high, you should back off. For years after my initial tangle with the stock market and brokers, I concentrated on investing in my own businesses or in myself by improving my skills, contacts and education. That paid off and provided me with the means to accumulate capital. In the ensuing years I became a journalist, specializing in stories about business, stock markets or white-collar crime. Three of my nine bestselling books were about misdeeds by brokers, businesses or criminals bilking investors or taxpayers by defrauding the immigration system, Employment Insurance, welfare, pensions or Workers’ Compensation. Perhaps this helped me, as well as readers, to avoid the types of pitfalls, frauds or bad practices that cost me as a rookie punter. It also taught me to create an investment portfolio encompassing multiple asset classes, countries, sectors, currencies and professional managers. It also made me realize that if I didn’t want to devote the necessary time and research to investments, I should delegate decisions to professional managers paid on their success rather than from churning my accounts. Over the years, I have successfully bought and sold stocks myself, but only those involving companies in my sector of competence: the media. Later in my career, I discovered another reality about life and investing—knowing when to cut your losses. This is rooted in the fact a concept can be great, and an investor wise and cautious, but he or she can still end up losing money. Likewise, a career or business can be great, then suddenly end up unprofitable. I came across a pertinent mantra, compliments of a Manhattan marketing guru who wrote “learn fast and fail faster.” In other words, go for it, but cut and run aggressively. This is exactly how I weathered my initial disastrous foray into equities. I’ve come to realize we are only as successful as our ability to overcome our failures. And that includes drawing the correct lessons from failures, too. —Diane Francis, Editor-at-Large for the National Post