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Friday, December 4, 1998

A Foolish Transformation

by Frank Womble ([email protected])

Back in the bad old days before Fooldom, when the Wise had free reign o'er the land, I didn't take the time or expend the energy to try to understand investing. For years, I had invested my IRA in one mutual fund. Then I signed on with a well-known full-service broker because a friend of mine had gone to work there and because I wrongly assumed that the biggest name in the investing world would make me tons of money with no effort or thought on my part required.

My full-service broker prepared a financial analysis for me that I now suspect was computer-generated. He also convinced me that the following were good investment ideas:

-- Buying shares in 10 utility companies chosen for their high yield, which were rotated once per quarter to the tune of $75 to $100 per trade. The entire utilities industry was deregulated shortly thereafter, and my utility stocks dropped like a stone. I lost a bundle while paying high transactions costs.

-- Exposure to foreign and emerging markets. I bought a mutual fund that invested in Latin American companies. The Mexican peso was promptly devalued and that fund promptly dropped over 30%. (The recent bloodbath in emerging markets speaks for itself in terms of investor risk).

-- A Dow 10 Unit Investment Trust. A good idea -- but why does a fund that needs absolutely no active management charge expenses of 2.75%?

-- Three other underperforming in-house mutual funds, in order to "diversify."

I spent over three years paying high fees and wondering how I could be doing so poorly in a booming stock market. Then several years ago I accidentally stumbled upon The Motley Fool along with an offering of free online time from AOL. After reading the 13 Steps to Investing Foolishly, the scales fell from my eyes and I decided it was time for a major change in my investing life.

My broker was quite surprised when I told him I was going to close my "full service" account, stop investing in mediocre mutual funds, and manage my own money via a discount broker that charged only $9.99 per trade. He said that he had never heard of The Motley Fool or the broker (it was Datek -- the fastest growing discount brokerage) and warned me that trading in odd lots would cost me more. When I told him that was incorrect, he mumbled, "I don't know how they can do it."

My experience with a full-service broker made me just that -- broker. Today I have a different and more Foolish outlook, which has made me happier and improved my returns dramatically.

Life is a constant learning experience. Lessons that are taught by the School of Hard Knocks tend to make lasting impressions. Here's some that I learned:

1. You, and only you, are 100% responsible for making decisions concerning your money. My old broker only recommended those things, but I decided -- an important distinction. If you let someone else decide for you, that also qualifies as a decision on your part.

2. Keep your personal life and your business dealings separate. Don't do business with friends, since it leads to conflicts of interest.

3. If you pay for a service, demand value for your hard-earned money.

4. Just because you have made a mistake is no reason to continue making it.

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