“You only have to do very few things right in your life so long as you don’t do too many things wrong.” — Warren Buffett

Learning Lessons the Hard Way

In the fall of 2004, I sold 300 shares of Amazon stock as part of a down payment on my first, and to this point only, home.  Wait, before you say “Man, that Grumpus is an idiot” there is more to the story.  I bought a home in Southern California (SOCAL) only eighteen months before the height of the housing bubble.  For those of you unfamiliar with historical SOCAL housing prices, I’ve posted the below chart of what housing prices did in San Diego from 1987 to 2015:

Yep, that’s bad. So bad, in fact, that my home’s value only recently passed the original price for the first time since the bubble burst. In the meantime the amount of Amazon stock I sold in 2004 would have done this:

OK, now you can say it now — I am an idiot.

My Issue With Learning From Other People’s Financial Mistakes

Somewhere between his blog and bestselling book, I read a JL Collins passage that essentially stated the most memorable money lessons people learn come from their mistakes. He also said that he was an expert on learning memorable money lessons.  Of course, I looked at both the blog and book but couldn’t find the exact quote in time for this post.  I agree with the sentiment though.

Many bloggers, podcasters, and authors in the Financial Independence (FI) sphere are self-deprecating enough to list their money mistakes at some point in their body of work.  I’m thankful to them for being so honest and setting a standard worth emulating.  However, while I find these lists useful in some respects, I find them lacking in others.  I would prefer to learn from other people’s mistakes, but many of the lists come off as nothing more than “don’t do that, do this instead” and are not all that memorable.

Precious few FI authors weave a story with enough impact to replace an almost biological need (in me at least) to learn financial lessons the “hard way”.  JL Collins is one of those authors of the rare exception.  Scott Allan Turner, a self-professed “former money moron”, who runs a podcast I’ve referred to in the past, would be another.  Mr. Money Mustache deserves a mention in this category as well.

Great Story Tellers

My other issue with the “money mistake list” is that many authors, either intentionally or unintentionally, make it seem like those money mistakes were easily and obviously avoidable.  I discovered that in my financial life nothing could be further from the truth. In hindsight, after several years of self-education on personal finance, my mistakes now look easily identifiable and avoidable.

But, in a country where Fortune.com reports that “Nearly Two-Thirds of Americans Can’t Pass a Basic Test of Financial Literacy” I don’t think financial mistakes are easily avoidable.  Furthermore, I would cast an extremely skeptical eye on anyone claiming significant financial success without a history of at least a few major money mistakes along the way.  Life just isn’t that smooth, or linear, especially when it comes to money.

A Grumpy Meander

Which brings me to the title of this post.  It’s a riff on a popular book often cited within the FI community entitled a Random Walk Down Wall Street.  I must admit, I never read it, which is a shame.  My financial journey began in the early 1990s at a time when this book was popular, and I certainly could’ve used its insights.  That said, now that I’ve educated myself on financial issues, I understand both Random‘s contents and sentiment, because many of the modern authors I’ve read revere this book.

I riffed Random‘s title to highlight that my financial journey has been anything but intentional.  Until 2014, my financial failures were many, successes were few, due to luck, and not part of some well-informed plan.  Of course, if you’d asked me during those days I’m sure I would’ve told you something different. But to be clear, I was financially ignorant.  Yet, like that Warren Buffett quote at the top of this post, I managed to avoid doing too many things wrong and now find myself within striking distance of FI.

Does that make for a memorable enough story for readers to learn from?  I hope so because much like rebellions, financial enlightenment is built on hope. Specifically the hope that you can improve your situation no matter how bad your previous errors.  My story is proof of that.  I hope yours is too.

Young Grumpus, the Beneficiary

Yes, I had a Trust growing up.  But, before you start grumbling about a silver spoon, withhold your judgment for just a second.  At age 13 I was involved in a rather dramatic accident. I only survived by miracle or random luck.  Take your pick, I waffle all the time about it, but the key point is that it didn’t kill me.  I was badly injured though, mangled really. While my body bounced back in the way only a young, otherwise healthy, teenager’s could, my parents still sought damages on my behalf.  Their reasoning was that although I recovered, someday those injuries might begin to plague me.  Thus, by age 16 I found myself the beneficiary of a Trust set up in my name for a little over $100,000 with Grumpus Maternous (my Mom) as the Trustee.

Grumpus Maternous, who grew up poor, married well (a doctor), but lived frugally, was adamant that we invest the Trust money.  I knew nothing about investing, and to be honest, neither did she.  So, she set up the account with an investment manager.  She insisted that since I was the beneficiary, I go to the meetings between her and the investment manager.  I remember only fragments from those days.  The guy was a self-described follower of Warren Buffett and handed me a booklet that he had written describing his investment philosophy.  I tried to read it several times, but it read like Greek to me.

Instead of exploring the issue further, I went back to being a teenager. I knew that Grumpus Maternous was not going to let either the investment manager or me blow the money.  I was vaguely aware that the manager invested half my money in a mutual fund and half in individual stocks, most of which were blue chips of the buy and hold variety ala, Warren Buffett.  It was a completely normal investment arrangement for the era and well before the popularity of index funds (a discussion point which would have been lost on me at the time anyway).  To this day, I’ve no idea what the expense ratios were or how the guy was compensated.  Ultimately, I knew that I wanted to go into the military so the money was nice to have but not necessary to my life plans.

Grumpus the Day Trader

Fast forward to age 23.  Through a series of events not pertinent to this story, I was recuperating at my parent’s home from injuries sustained in military training.  I would spend over a year healing before heading back into yet another round of military training.  Although I was technically discharged, I was receiving a small amount of money a month from the military for the injuries. Since I was concentrating on getting healthy, I saw no need to get a job.  To bide my time I started day trading. Or, to be more truthful, I made an attempt at an approximation of what I thought day trading consisted of.  In other words, I sat in a room with a TV tuned to CNBC and a computer logged into Ameritrade (before it became TD Ameritrade).

By this point, the Trust was no more, and the money from the lawsuit was all mine.  Previously to that, I had only cracked the seal on the money twice: once to help fund my older brother’s record label, and to pay for my Master’s degree (obtained in Europe).  One of those decisions was the best choice I ever made to spend that money. The other one, not so much.  I’ll let you figure out which is which.

Most importantly, the bulk of the money was intact and invested with the same money manager my parents had set the Trust up with.  But, this was the era of the DotCom bubble, which means Fear of Missing Out (FOMO) had me firmly in its grip. Of course, I thought my guy was an idiot and that I could do better than whatever type of return he was earning me.  So, I took control of the money, sold the 50% invested in the mutual fund, and started trading stocks.

Winners and Losers #1

Maybe it was at this point, or sometime after, that I picked up the Amazon stock.  I’m not quite sure as my Microsoft Money files don’t go back that far.  I could probably dig out the paper statements from my boxes somewhere, but it’s not germane to the story.  What you need to know is that all I was doing was listening to the news for the “next hot stock” and buying and selling as those stocks went up and down.

There are a few things worth noting at this part of the story.  One, if it isn’t apparent already, let me state it plainly: I had no idea what I was doing.  It’s not like I bothered to read any books (or even get on Yahoo Finance) to try and educate myself about how to value companies.  In fact, my older brother who was an actual stockbroker (thankfully, because his taste in music proved questionable), tried to tell me about these things called “SPOOs” and “SPYDERs”. His point was that I’d be better off just buying a bunch of those.  For those unfamiliar with SPOOs and SPYDERs, those are the old nicknames for S&P 500 index funds and ETFs.  However, I blew off his advice and (probably) bought some Pets.com stock instead — they had such a funny mascot!

Winners and Loser #2 and #3

The second point worth noting is that I’m fairly certain my Mom thought I would lose all the money.  The same money that she’d ensured would be there in case my body started to break down from my accident.  In fact, she was so scared, that after only a few months she found me a real job until I could get back into the military.  Smart lady.  Of course, I’d come home from the job and hop onto my Ameritrade account and make some trades.  However, her attempts to keep me from majorly damaging my future financial well-being worked!

Which segues into point number three and the fact that despite my ignorance, I never risked everything.  I had a vague understanding that what I was doing was risky. As a result, I didn’t touch the blue-chip stocks that my original money manager bought. Unfortunately, though, I learned the wrong lesson.  Since I didn’t lose my shirt, investing to me remained a game of picking singular stock winners (of which I picked few) and losers (of which I picked a good many).  That mentality stuck with me through early married life as Mrs. Grumpus and I started to invest in our retirement accounts.  While I wasn’t “day trading” anymore, I was still risking our money by trying to pick individual stocks.

Grumpus Herdus

Which brings us back to 2004 and selling off the Amazon stock to accumulate the necessary down payment for our home. I’d been stationed in Southern California from 2000 to 2002 and was kicking myself for not buying a home the first time I moved there. As a result, I was adamant that this time I was going to make the “smart” move and buy a home.  I loved the area, and I thought it was where I would retire after the military.

What did I know about real estate at the time?  Nothing except that the market was hot! I needed to get in before prices got too high!  FOMO had me again. Thus, I bought a copy of Home Buying for Dummies, read it, got a real estate agent, and found a condo for the future Mrs. Grumpus and myself.  At least I read a book this time, and it actually proved a useful resource!

The Down Payment

I chose a 30-year mortgage because after reading the Dummies book, I didn’t like the idea of an adjustable mortgage or interest only loan blowing up on me.  It’s one of the few saving graces in this story.  On the downside, I decided to put one-third down on the home.  I’m not sure why I decided on one-third for the down payment, except to say that I knew I wanted to avoid PMI — which I could’ve done with only 20% down.  In order to get to one-third though, I had to sell a lot more stock than just Amazon.

In fact, I sold most of my remaining blue chips, all the stocks remaining from my day trader gig, and any other individual stocks I’d acquired since joining the military.  I listed the entire basket of stocks I sold in the left-hand column of the graphic below. I also listed their original cost and then calculated their current (2017) value.

In total, had I hung on to the stocks and not sold them to buy that house, they would’ve provided a 762% Return on Investment (ROI). After subtracting my cost basis, I would’ve had roughly $750,000 more in my investment account than currently.  That’s one hell of an opportunity cost!

Grumpus the (un)Learned

So what’s the point to all of this?  What conclusions can you draw?

If nothing else, the purpose of and method for calculating Opportunity Costs should be painfully clear.  Opportunity Cost is the amount of money that one choice costs vs. another.  I didn’t engage in Opportunity Cost calculations prior to buying my house, and I paid the price, literally.  I could’ve easily projected a Future Value for those stocks using a reasonable rate of return like 7% (the average return of the S&P 500 after inflation), and seen for myself how much money I was forgoing by buying an overpriced Condo in Southern California. But that’s not how a person thinks when running with the herd and chasing the “next big thing”. Make no mistake, FOMO is a nasty four-letter word.

Also, none of my decisions about employing the trust-fund money were connected to a greater strategy.  Grumpus Maternous had a strategic vision for what the money could and should do for me later in life, but I did not. Until 2014, I hadn’t even bothered to financially educate myself in order to talk intelligently about the financial issues I routinely faced.  Think about it, in this story I’ve referred to monetary decisions about college education, home buying, long term health care, and retirement.  That’s a hit list of life’s major money decisions; all of which I made in a disconnected manner from one another.  The only silver lining in that storm cloud is that I’ve made planning and resources two of the main features of this blog based on my experience.

Lessons Both Big and Small

At the micro level, the lessons learned probably get a bit more subjective depending on your relationship with money, investing, and planning.  For those of you who believe in value stock picking, there’s certainly a case to be made for the “miracle” of compounding interest or dividends in conjunction with a buy and hold strategy.

Given that the McDonald’s, Altria (formerly known as Phillip Morris – MO), Pepsi and Yum Brands (Taco Bell and KFC) stocks listed in the above graphic were left over picks from the money manager my parents used for the Trust, there’s also an argument to be made for use of a professional vs. the dart throwing I did. While I feel the index fund / FI crowd cringing in their seats when I make that statement, consider this: the S&P 500 return over the same period was only 175.806% with dividends reinvested. My basket of stocks would’ve returned 762%.

As far as paying for a financial advisor no matter what the cost, it would’ve made sense. Take away my lucky Amazon pick and you’ll notice that the other two stocks I chose (JBL and VIA) were the two worst performers in the group.  That doesn’t even include any money I lost during my “day trading” career either.  Had I still been using the investment manager in 2004, maybe he could have at least educated me on Opportunity Costs.  Or maybe not, I don’t recall the guy providing me any sort of financial planning advice, which is what I really could’ve used.  Some good, fiduciary standard, financial planning — even at 1 – 2% of assets managed — would’ve still put me well ahead of where I am currently.

Now, some of you might think that I’m being extremely hard on myself. You might think that no 16 or 18-year old in that situation could’ve effectively formulated a plan or articulated the need for a planner.  True, but by the time I got around to buying a house I was nearly 30-years-old. That’s old enough to know better.  Honestly, though, I’m not here to tell you what to think.  I’m just hoping someone can learn from my mistakes.  In that vein, it’s probably worth telling you how all of this makes me feel.  So here we go …

Grumpus Goes Emo

My emotions are somewhat raw. Actually, that’s an understatement, I’m pissed-off. This is the first time I’ve actually calculated the opportunity cost to the dollar.  Since at least 2012, I’ve known that buying the condo was an expensive decision.  I just didn’t know how expensive until now.  Thus, I’d be lying if I told you I wasn’t angry and didn’t regret buying that property.

On the other hand, we found renters every time we moved away from San Diego, which kept us close to break-even point on a monthly basis. So, the condo didn’t put us in a financial bind. In fact, it provides some tax benefits whenever we rent it out, which are positive, but hard to calculate.  That said, it was a flop of an investment no matter how you look at it.  Since it was never going to be our “forever home”, forgoing the ownership experience wouldn’t have significantly altered the life of my family or my career.

Alternatively, the potential wealth accumulation I passed up (when I sold the stocks) could’ve made a huge difference when I hit my Golden Albatross moment a few years ago.  Had the money been invested and earned the above-cited rate of return, it could’ve altered the course of my career, my mental health, and my family for the better.  That thought alone is enough to make me extremely f-ing angry.

Luck Maketh not a Great Financial Plan

When I push through the anger and regret and try to look at this more holistically, I feel …. lucky.

Consider this: my financial ignorance meant I endangered my and Grumpus Familias’s financial security on numerous occasions.  In fact, I carried on for ten more years before educating myself (as related in Part 2 of this post).  Despite my dangerous behavior, we came through relatively unscathed.  Other than the mortgage, we are not in debt.  We were never underwater on our home and still managed to amass enough wealth to make early retirement possible after only a few more years in the military.  We travel when and where we want; eat well; engage in the recreational activities we like; live in a nice home, and still, save a large percentage of our income.  Again, my financial story in many ways embodies the Warren Buffett quote at the beginning of this post.

Do I have regrets?  Sure.  Despite my kick-ass Nome de Guerre, and finding peace of mind through financial planning, I’m only human.  I wish I had made a plan and had not relied on luck to see me through.  With that said, for my own good, I believe it is important to keep this all in perspective.

Therefore, I choose to look at this episode in the following way: in a country where two-thirds of its citizens cannot pass a financial literacy test, an individual’s financial education is likely to come at a steep cost.  The running price tag at this point in my financial story stands at $750,000.  It could be worse, a lot worse.  That number could’ve easily been – $750,000, as opposed to simply a missed opportunity to amass wealth.  But, it’s not, and I should be thankful. As I pointed out previously, though, the story ain’t over yet.  There’s still plenty of opportunity for this to get worse before it gets better.  So, I think I’ll withhold judgment for now because the story continues in part 2 of this series here!