Monday, October 6, 1997
What You Know Sometimes
Ain't Enough
by Tod Allen
([email protected])
A recent Fribble made me think of my first venture into stock investing. The following two sentences from this Fribble struck a chord with me. "Invest in what you know. After all, isn't it easier to spot a counterfeit if you are familiar with the real thing?"
I have been heavily involved for many years in petroleum-storage-tank regulation and petroleum-contamination cleanup resulting from leaking tanks. When I made my first stock purchase in 1993, I had supervised the leading state tanks program for over three years where I worked with the EPA, other states, Big Oil, consultants, et cetera. I had also worked as a private contractor for over three years.
One of my clients in late 1993 was a small petroleum-storage-tank/petroleum-cleanup contractor. In one of my conversations with one of the principals of this outfit, he mentioned that his company was about to be purchased by another company. I had just read Lynch's book One Up On Wall Street, but apparently the only lesson I had absorbed from this book was the advice to "invest in what you know." I asked my client for more information about this company. He told me they were a public company with a state-of-the-art leak-detection system. He also said they were buying up several small companies (such as his) in anticipation of U.S. EPA tank regulations, which mandated a substantial amount of gas station retrofitting and cleanup work be initiated by 1998 all over the United States. I knew enough about the industry to know about the 1998 EPA deadline and that the potential market for petroleum storage tank and cleanup work was enormous.
I did a little investigating of the company and came up with a report from an "analyst" which raved about the company's future prospects. I also noted that the stock price had risen from about $7.00 per share to nearly $14.00 per share in about six weeks. I should also mention that at this time I had just been cut out of my biggest contract by a person I had known for years as a personal friend before entering the business relationship. This loss of business placed my pending purchase of a beautiful piece of acreage in jeopardy. So, in an effort to keep the land purchase, I took practically my whole savings at that time (about $60,000) and bought stock in the company, fully expecting it to double again in the next six weeks.
Well, guess what? I bought that stock within a half-point of its all-time high. Why can't I do that in reverse with winners?! I continued to hold the stock as it crashed back to about $5.00 over the next few weeks. A few weeks after this fiasco, I heard from another client that a class-action lawsuit had been filed against the company and, in particular, the principal of the company I was working for. It seems this guy had been issuing phony statements about recently signed contracts with several large companies in an effort to drive up the stock price. I got in on the suit and, about eighteen months later, was actually awarded an additional 1,400 shares of stock in the company as part of the suit settlement. However, I had to hold my shares while the suit was pending (or be excluded from the settlement) and the stock continued to decline to less than $0.50 per share, where it currently sits.
In the last five months I have made a serious study of the stock market and stock investing. In my readings I have repeatedly come across several basic concepts of stock investing. These concepts include such things as "never buy on emotion," "never risk more than a small percentage of your capital in any one idea," et cetera. I think I violated every one of them with that purchase. I keep the stock certificate sent to me from the suit settlement in a frame on my wall as a reminder to heed the lessons I have been learning, lest I squander my hard-earned capital on another half-baked idea. In that situation, I invested in what I knew, but it was what I didn't know that killed me.
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