My Worst Investment Ever Podcast

William Manzanares IV was born and raised in the Tacoma area of Washington State and is an active member of the Puyallup Tribe. He is a serial entrepreneur, having owned and operated successful smoke shops, convenience stores, and restaurants since 2005. William is passionate about helping small business owners as well as struggling readers. To that end he has written I Can’t Read: A Guide to Success Through Failure, telling the story about being unable to read as a youth and struggling with dyslexia, William hopes his new book will equip kids to improve their literacy and inspire them to pursue their dreams. He spends much of his time speaking with students about career planning and goal setting.   “I was excited. He offered high returns … and an equity stake in everything in the business. He talked a big game of how he was publicized everywhere and I said … ‘Okay, let’s do this’ … He did say after signing … checks that were written out in the contract, I’ll just pay you big chunk payments. So I got like a $5,000 payment, then a $10,000 payment … that took about six months to get those and then when a final payment bounced and I think he tried to write me another $15,000 check, it just didn’t go through. This was like six or seven months after I gave him the money and I went: ‘Oh, what did I do? (What have I done?)” William Manzanares   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Meets publisher selling Super Bowl tickets Will met the publisher of a local weekly newspaper who was also the PR representative for his native American tribe in Tacoma because he said he could get all kinds of tickets and Will wanted to take his daughter to see the Seattle Seahawks American football team play in the Super Bowl for the second time in its history. The guy was always around talking about his connections and that he always knew someone who could get show tickets to anything. Will let his guard down. Will invests US$60,000 in regional newspaper The man then started talking to Will about signing up other cities for his newspaper business, that he had just signed up another city and that he needed some investment money to sign up more cities in the Pacific Northwest region. The amount required was US$60,000 so will loaned it to him and got a lawyer to draw up a contract for the deal. Will was excited as the publisher was offering an equity stake in the business, high returns and “he talked a big game of how he was publicized everywhere and I said … ‘Okay, let’s do this’ … He did say after signing … checks that were written out in the contract, I’ll just pay you big chunk payments. So I got like a $5,000 payment, then a $10,000 payment … that took about six months to get those and then when a final payment bounced and I think he tried to write me another $15,000 check, it just didn’t go through. This was like six or seven months after I gave him the money and I went: ‘Oh, what did I do? (What have I done?).” Sees state of the accounts, realizes his money is gone Will called the publisher, inherently wanting to be a nice guy, and the principal made excuses, said he was sick, blamed everyone else but himself, but in the end let polite and persistent Will into the company’s offices to consult and maybe try to save the company. Will then spent half an hour with the bookkeeper (while talking to Andrew he admits he should have done this a long time ago). After he saw the books he realized he was never going to regain his money. The principal owed printers and many other people. He also was the public relations guy for Will’s tribe, so he had been telling people including Will that the tribe owed him a lot of money, and the tribe has a multimillion-dollar casino, so people thought they had the revenue. Thinking ‘success the best revenge’, Will starts his own So will did what some entrepreneurs would do, and instead of getting mad, decided to get even by starting his own online publication called Grit City, after the nickname they have given Tacoma. What he discovered was publications in start-up phase do not make money, so essentially, he was funding this new venture and in so doing, was throwing good money after bad. His CFO also told him later about sunken-cost fallacy. He had already lost so much money with the other weekly paper owner and he was sinking money into the new publication. One day he decided he could not continue, and as a gift, handed the business to his partners, and walked away, another $60,000 out of pocket. While his former partners made the publication work, Will will never make any ROI from any of the decisions he made. One small satisfaction though is that soon after he left Grit City, it was outranking the publication of the con artist he had had dealings with originally.     Lessons learned Do due diligence, look at company’s books and debts If someone offers you an equity stake in a company, look at their debts, look at their books. If they are not willing to show you, then they’re not good partners and they are trying to take something from you. Beware of con men and the “confidence” they show The nature of con artists or confidence men is that they make you believe in the confidence that they have. Don’t look at what someone’s doing for you just because they’re doing it for you. Chances are their “kindness” and “confidence” is part of a mass scheme of deception.     Andrew’s takeaways Six common mistakes Collated from the My Worst Investment Ever series, the six main categories of mistakes made by Andrew’s interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Will’s case features Mistake No.5 A common mistake is that we give money to people or business start-ups. Then we neglect to ask questions such as: “How is progress?” “What are your revenues this month?” “What are your costs this month?” “Can I see the financial statements?”, Due diligence first is getting access to that but monitoring is about keeping track of exactly what’s going on. For a lot of people that are investing in a private business, the first step must be: Make sure that the company closes its books every month, Make sure the accountants produce a balance sheet and an income statement Even though it’s more time in trouble and hassle, make sure you get those financial statements that will ultimately will be signed by an auditor. Trust can only be built with time There is no short cut to building trust between people. Only time works with building trust. Sometimes we like people when we meet them, and we think we can trust them. So when you come upon someone that gives you confidence and they’re really excited, just remember the first three letters of the confidence – Con! That is what “con man: comes from. Spite is not a good investment strategy     Actionable advice Don’t believe when you go into an investment about the high returns, think about whether or not you can afford to lose the amount of money you are investing?     No. 1 goal for next the 12 months Will would like to see people who struggle with reading picking up a copy of his book then after that, picking up more books and learning.   “I’ve made a lot of mistakes in my life with my reading struggle and one was not admitting it to the public, to anyone for most of my life.” William Manzanares   Parting words It’s okay to take risk. Just make sure you’re not risking everything you have.       You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Learn with Andrew Valuation Master Class - Take this course to advance your career and become a better investor Connect with William Manzanares LinkedIn Twitter Podcast website Facebook YouTube Connect with Andrew Stotz astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned William Manzanares (2019) I Can’t Read: A Guide to Success Through Failure  

Shawn Walchef is a restaurant owner, digital entrepreneur and a proud father. Since 2008, Shawn has owned Cali Comfort BBQ in San Diego County. In order to survive, Shawn knew early on to operate his family restaurant and sports bar like a tech company. Now whether it’s his annual #BETonBBQ “Turf and Surf” tasting event in August or his expanding catering empire in San Diego, Shawn’s many business ventures all incorporate technology, especially the kind you use everyday on your cell phone. That’s how he discovered podcasting. Since Shawn first started a business and BBQ-themed podcast almost three years ago, he’s watched podcasting grow, with many shows popping up that he’s helped inspire. Shawn has played a big part in getting so many fellow BBQ business owners into podcasting. Listen today to his Behind the Smoke: BBQ War Stories podcast where he guides viewers and listeners through the ever-evolving world of digital marketing and this helps his fellow restaurant and business owners adapt and succeed. Shawn will begin releasing weekly audio and video episodes in the fall of his new Digital Hospitality podcast. On the show, he and his guests will get personal and truthful about what it takes to truly thrive in business, sharing advice on social media, blogs, and digital tips and tricks. The show will also explore topics that aren’t usually discussed on a business podcast like health and wellness. To find episodes, educational blogs, and behind the scenes content online at CaliBBQ.Media. “Basically, he wanted me out and he wasn’t going to pay me back. He wasn’t gonna pay me back the money, and he was going to keep the liquor licence. And you know, at that point, I had never been spoken to like that in my life. I had trusted him. My business partner, Corey, my best friend at the time, we had trusted him, we had put all of our hopes and our dreams into this restaurant business. But we did it in a way that we had no control.” Shawn Walchef   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Grandfather trusts him to run real estate business Shawn never knew his father, but learned a great deal from his medical doctor grandfather, who raised Shawn with of course the help of his grandmother and mother. From a very early age, his he taught Shawn that hard work is good, but that hard work and education would get you ahead in life. Shawn grandfather also sent him to university in Colorado and Alicante in Spain. During his time abroad, his grandfather asked him to return to San Diego as he had been made the trustee for grandpa’s estate as Shawn was the only person he trusted. After his grandpa retired as a medical doctor, he had started investing in real estate. So he needed help with his real estate business so Shawn transferred to the University of San Diego. This allowed him to spend time with his grandfather, to help him write his memoir, and to just be there to learn from him, about his life and business. Attempts to enter law schools fail Shawn thought he was going to be an attorney, so he took the L-sat, studied very hard, and applied to law school. He was rejected by all three of San Diego’s law schools, which hurt a great deal. Then his best friend who was with him in Spain moved to San Diego and Shawn suggested Corey help Shawn manage his grandfather’s real estate, which they did around 2006. Early on invested eatery with liquor license Grandpa had purchased a property in East County, San Diego that had an existing restaurant, which had a liquor license, a type-47 liquor license, which allows you to sell beer, wine, spirits at an existing restaurant space. The license is very valuable in the San Diego market. They thought, if someone wants to open a bar, or restaurant, anywhere, the profit is in the liquor, which was a very attractive proposition for the two budding business partners. They decided to purchase the license for their grandfather. So at the time was valued at US$75,000, but they bought it for $50,000. They also raised another $50,000 so that they get into the restaurant that was being operated by a man named Howard. He had been operating a breakfast restaurant and Shawn and he had become friends. Howard was looking to expand his business so the boys said they would add the liquor license and help by including a dinner service and turn it into a sports bar. Boys take 49% share in restaurant with ‘Howard’ The deal was this: Howard would run the restaurant and he would have majority interest, a 51% ownership stake in the company. Shawn and Corey had 49%. Young and naïve, and not knowing Howard nearly as well as they should, the boys started working, making capital improvements to the business, adding flat screen TVs, adding products so that they could create a dinner menu, and adding staff. Howard goes on rant about spoiled brats and hard work But Howard didn’t like many of their actions, and one day after the boys had been installing some TVs, Howard blasted Shawn in front of customers, staff members and Corey. He accused Shawn of being lazy, being inexperienced and spoiled. He regretted bringing in the liquor license and the partners, said he wasn’t going to pay him back the money invested and that he was at the same time going to keep the liquor license. Shawn had never been spoken to like this and he and Corey had trusted the guy, and had put all their hopes into the restaurant business. But they had done it in a way that they had no control. While they did it with the best of intentions, ultimately they were at the mercy of Howard, who held the majority stake. Shawn turned bad to good, ends up recovery all Even though this was the worst investment in his life, he turned everything, including an abusive voicemail, to his benefit. He kept the voicemail, played it, added it to his iPod and used it as his workout mixtape. For Shawn, it became just motivation. Fortunately, Shawn filed a lawsuit against Howard to recover only the money he and Corey had invested but he was able to recovery everything, including the money and the license. After a year or so, Howard failed in the location and Corey and Shawn took over that location, which then became Cali Comfort Barbeque, which was the start of the businesses they are running now. The voicemail that Howard left became the intro to the first 30 podcasts episodes of Behind the Smoke. Shawn says if you’re going to be in the business, if you’re going to invest in things, you have to understand that there’s the human element, and there’s a human element that you can’t control. All you can do is do your best and you need to put yourself in a position where you can control the narrative. “So my workout mixtape was this man screaming at me telling me that all I’d never worked a day in my life and that I’m worth nothing.” Shawn Walchef   Lessons learned Make sure you get majority control if you really want to run a business If you really want to play a part in a business, and it’s a business or investment you truly are interested in, get executive control. Make sure you and you alone or you and a trusted partner are the running the business. Never put yourself in a position of being without a majority stake and without control. I understand a lot of times, you have to raise capital and do things, so that you could get any business open. When you don’t have control, you don’t have creative flexibility. Adapt to survive, pivot to thrive If you don’t or are unwilling to change (in your business dealings or investments) it will be very difficult to operate any business, especially restaurants or bars. In hospitality, invest in making memorable experiences Restaurants are risky investments but food of course is a necessity. Every village needs the local pub, every village needs the local eatery. It doesn’t matter where you are in the world, there’s a place that you love, that your family loves, that when it’s your birthday, your grandmother’s birthday, that’s where she wants to go, you have a special table, somebody makes you feel a way that’s memorable. “If you’re going to invest in a restaurant, invest in the jockey, don’t invest in the horse. The jockey is the person that’s really the visionary behind it, the person that’s going to no matter if they get knocked down 20 times they’re going to get up 25 times.” Good hospitality partners will always ask: “How do I improve this business?” “How do I make this business work?” “How do I shift?” “How do I do something?” “How do I do online delivery now that that’s important?” “How do I keep my staff engaged so that they take care of the village and that people are excited and they want to come back?”     “If you’re going to be in the business, if you’re going to invest in things, you have to understand that there’s the human element, and there’s a human element that you can’t control. All you can do is do your best and you need to put yourself in a position where you can control the narrative.” Shawn Walchef     Andrew’s takeaways Collated from the My Worst Investment Ever series, the six main categories of mistakes made by Andrew’s interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Andrew says Shawn’s case features most common mistake No.2 “Failed to properly assess and manage risk” When we get excited about the returns and the opportunity, we often ignore the risks. Now Shawn having experienced what is truly at stake understands the risks a lot better now. And Mistake No. 4: Misplaced trust Whenever we go into business, we usually have to do it with other people. We must ideally want to find people that we trust. The most important thing Andrew has learned about trust is there is no shortcut to building it. Ultimately, trust takes time. Remember, it’s actually a bit of a dilemma because looking at a business idea, entrepreneurs want to jump in, and often need to act quickly also, but you can’t act rashly. By the same token you also can’t wait too long. But never forget that ultimately, you’re trusting the people around you to you know, to work with you, to get where you’re going. Great idea to use failure and rejection as motivation Success can be motivating, but being told you can’t do something or you get rejected, it can really put a fire in your soul. If you don’t iterate, you die eventually A good entrepreneur knows that changing, pivoting or iterating must be almost constant in the quest to discover what really works in a business, and most importantly, what works for your customers. If you don’t iterate, you die eventually.   Actionable advice “If it’s an investment that you are personally going to be involved in, from a business standpoint, from an operational standpoint, from a visionary standpoint, make sure that if you care about it, and love it and want it to succeed, that you have the majority, controlling interest and be ready to devote your life to it.”   No. 1 goal for next the 12 months His number one goal is to get his family moved into their new home Next is getting the Digital Hospitality podcast launched on a weekly basis Then he wasn to launch is book in which he’s going to talk about all the secrets, missteps, the Howards, the failures, the lawsuits, the litigation, the funding, all the things he and his business partner had to do to keep their doors open in hopes that some other restaurant owner can read, gain some insight, and hopefully avoid the mistakes that Shawn and Corey made.   Parting words Stay curious and get involved.     You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Connect with Shawn Walchef LinkedIn Podcast Twitter – Cali Comfort Twitter – Cali BBQ Instagram – Cali Comfort BBQ Instagram – Cali BBQ Website – Cali Comfort BBQ Website – #BETonBBQ Website – Media Facebook Email Connect with Andrew Stotz astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned

Ted Seides, CFA, is the son of a teacher and a psychiatrist. Perhaps by genetic disposition, he is passionate about sharing his insights and investing in people. He is the chief investment officer of Perch Bay Group, a single-family office he joined in 2017 to manage a diversified portfolio of direct and fund investments across asset classes. Ted produces and hosts the Capital Allocators Podcast, which by the by the end of 2018 had reached one million downloads. From 2002 to 2015, Ted was a founder of Protégé Partners and served as president and co-chief investment officer. Protégé was a leading multibillion-dollar alternative investment firm that invested in and seeded small hedge funds. Ted built the firm’s investment process and managed the sourcing, research, and due diligence of its portfolios. In 2010, Larry Kochard and Cathleen Ritterheiser profiled Ted in Top Hedge Fund Investors: Stories, Strategies, and Advice. Sharing the lessons from his experience, Ted authored So You Want to Start a Hedge Fund: Lessons for Managers and Allocators in February 2016. He began his career in 1992 under the guidance of David Swensen at the Yale University Investments Office. During his five years at Yale, Ted focused on external public equity managers and internal fixed-income portfolio management. Following business school, he spent two years investing directly at private equity firms, Stonebridge Partners and J.H. Whitney & Company. With aspirations to demonstrate the salutary benefits of hedge funds on institutional portfolios to a broad audience, Ted made a non-profitable wager with Warren Buffett that pitted the 10-year performance of the S&P 500 against a selection of five hedge fund of funds from 2008-2017. Ted is a columnist for Institutional Investor, wrote a blog for the CFA Institute’s Enterprising Investor, and wrote guest publications for the late Peter L. Bernstein’s Economics and Portfolio Strategy newsletter. He is also a trustee and member of the investment committee at the Wenner-Gren Foundation, an active participant in the Hero’s Journey Foundation, and is a decade rider with Cycle for Survival. He previously served as a trustee and head of the programming committee for the Greenwich Roundtable and as a board member of Citizen Schools-New York. Ted holds a BA in economics and political science, Cum Laude, from Yale University and an MBA from Harvard Business School.   “It was one of those examples that the market can stay rational longer than you can stay solvent, and that really anything can happen. There was nothing about the fundamentals of these assets that would have told you that this could have happened.” Ted Seides   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Ted chose one of his worst investments ever based on its outcome. In 2002, during his early years at Protégé Partners around the launch of that fund, one of the core investments they were making was in a multi-manager hedge fund portfolio. Within that portfolio, one of the core investments was in a relative-value arbitrage hedge fund called Parkcentral Global Hub. Principled fund group included Perot family It was a group that had spun out of or was included in the family office of the late Ross Perot. And the group had been managing its strategy for a long time very successfully in a kind of value-oriented, relative-value manner with a very long time horizon. There was a tremendous amount of co-investment (a minority investment made directly into an operating company alongside a financial sponsor or other private equity investor, in a leveraged buyout, recapitalization or growth capital transaction). Perot had put around US$500 million into the fund and there were highly skilled people running it. Seides said it was a rare case of an investment management organization run with great business principles. Fund launches in 2002 and grows to nearly 3bn in assets The fund launched to outside investors in July 2002, growing to US$2-3 billion in assets until they closed it to new investors. It continued to progress well under the goal of making 10%-12% a year with relatively low volatility. And they had done that historically. They found new structures and strategies, were very insightful and had good communcations enabling investors to know exactly what was going on. Few blips in Spring 2008 but nothing major But, heading into Spring 2008 the situation became shaky for them. A few things went wrong, but they were within the bounds of their understanding of risk and in the summer and into the fall, they would come by the office and said their largest position was a relative-value trade in the commercial mortgage-backed space. Out of the 2008 crisis, most people remember that subprime residential mortgages blew sky high. But in the commercial mortgage space, if considering the fundamentals, there were apparently few problems in the economy. Serious concerns aroused after fund loses 13% by September’s end But strange things were happening in the capital markets because of the turmoil, especially in September. The fund survived the Lehman bankruptcy in October, but going into November, they had a particular trade where they were going long in some senior debt – commercial mortgage-backed securities. The senior debt was priced as if something like 40% of the underlying commercial real estate would have to default with no recovery at all. And all because of the turmoil that was happening in the markets. It was so bad that the fund managers said it no longer made sense to continue to hedge with the junior debt because it had gone down so much that it was not really hedging anything, so they let all the clients know what was happening. By the end of the month, Parkcentral Global Hub had lost 13% of its value, in part because of commercial mortgage-backed securities, an affidavit from the Bermuda liquidators now says. October takes another 26% out, reducing net-asset value to under US$1.5bn In October, the fund lost an additional 26% of its value, reducing the fund’s net assets to just under $1.5 billion. November darker As November rolled in, the situation got worse. Losses continued early in the month and accelerated beginning in November 12, as the bottom fell out of the commercial mortgage-backed securities market. In just one day, November 18, the fund lost $300 million. In that deadly six days in November, his office in New York was saying that they kept putting money into the trade, backing the collateral, but it kept getting worse. For one day that those prices moved, Ted remembered, it was around 1,700 basis points over treasuries. That was the equivalent of something 60% of all of the commercial real estate that underpinned these assets had to go bankrupt with no recovery. Fund’s net asset value goes to less than zero On that great day of loss, all the money in the fund was gone, in fact, more than all the money in the fund. The fund net-asset value (NAV) went to zero. They could have described it as poor risk management, you could have described it as being involved in the drive by shooting. So what what happened, though, was that most of the principals in the organization had all of the their money invested alongside the client and lost all of it. Perot lost maybe $500 million, maybe it was more. But he did decide against putting billions back in the trade to get to the other end, which was the implicit reason why they would be able to withstand turmoil. Events were around the time Madoff was exposed This was all around the same time or a little bit before news about Bernie Madoff emerged. But at least today most of the investors have probably gotten most of their money back with all of this recovery from Irving Picard. But for Ted and his team, they only held a 2%-3% position in the portfolio, and therefore could withstand the hammering. But it was one of those examples that the market can stay rational longer than you can stay solvent. And that really anything can happen. There was nothing about the fundamentals of these assets that would have told you this could have happened, Ted says. “You could have described it as poor risk management, you could have described it as being involved in the drive by shooting … what happened, though, was most of the principals in that organizsation had all of the their money invested alongside the client and lost all of it. Ross (Perot and his family) lost … maybe … $500 million, maybe more.” Ted Seides Some lessons Anything can happen In something you underwrite, in this case an investment management organization that was a great organization that had done everything the right way except for one thing – which was they had leverage and they failed to manage risk in the worst possible moment to be able to withstand the “hundred-year flood” that hit Be very wary of any investment that is leveraged Such a situation can easily lead you to losing control of your wealth and future. Ted talked about how markets can stay rational longer than an investor can stay solvent. He said that not only is this true, but all investors are not immune to this happening. If using leverage in your strategy, you absolutely must understand how you’re going to survive a big storm   Andrew’s takeaways The key lesson is the issue about leverage Overconfidence can creep in and lead to dangerous decision But it’s very human and happens all the time. In the investment field, analysts, researchers and allocators are paid for strong opinions and to “putting their money where their mouth is” and convey belief in their opinion. That can lead to overconfidence, which can creep in despite being years of discipline and one day the self-belief overreaches and the money injected is excessive. It’s then that big losses occur. Diversification was key for Ted While the lack of it wiped out the fund he was investing in, it didn’t wipe out Ted because he had used the diversification technique of sizing his position. Two main risks an analyst should look out for when analyzing companies Leverage Forex If a company has no debt, and no foreign exchange exposure, a huge amount of potential risk is eliminated.     Actionable advice All investors should get a lot more creative on how much worse it could get than the worst-case possible outcome, because again: “Anything can happen.”   No. 1 goal for next the 12 months To figure out how the work he has done on his own podcast can best benefit an investment organization.     Parting words “Andrew, keep this up. It’s a lot of fun and it’s a terrific way of trying to tease out lessons.”   You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Learn with Andrew Valuation Master Class - Take this course to advance your career and become a better investor Connect with Ted Seides LinkedIn Twitter Website Podcast Connect with Andrew Stotz astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast   Further reading mentioned Larry Kochard and Cathleen Ritterheiser (2010) Top Hedge Fund Investors: Stories, Strategies, and Advice Ted Seides (2016) So You Want to Start a Hedge Fund: Lessons for Managers and Allocators Ted Seides (2006)

Michael Oyster is the founder and CIO of Oyster Capital, a multifaceted investment advisory organization dedicated to providing customized solutions for planners, advisors, investment managers and asset owners to assist in the achievement of all types of investment goals. Previously, Michael served as senior quantitative analyst with options advisory firm Schaeffer’s Investment Research conducting research on options, markets and behavioral metrics, as well as managing proprietary options-based investment strategies. He joined investment advisory firm Fund Evaluation Group (FEG) in 1999, and began researching traditional and hedge fund managers as well as conducting topical research on markets and the economy. As FEG’s chief investment strategist, Michael served as a thought leader and frequent presenter on markets and the economy. Michael is the author of countless papers as well as two books: Mission Possible, Achieving Outperformance in a Low-Return World, which was published by Dearborn Trade in 2005; and his new book, Success in a Low-Return World was published by Palgrave Macmillan in November 2018. Michael is a graduate of the University of Cincinnati with a BBA in finance, a CFA charterholder, and a CAIA charterholder.   “Now I’m thinking this is the worst possible case scenario. And it really ended up being a terrible situation because everything that I had put into the portfolio that I thought was a terrific long term investment turned out to be absolute garbage.” Michael Oyster     Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.       Worst investment ever Portfolio chief has final say on what goes into investment packages In the middle of 2014, Michael was head of the portfolio management team at FEG, a very good group of talented people who advise institutional investors, and non-profit institutions, which are mostly endowments, foundations. His job at the time was to build portfolios for the clients that gave us discretion. Within a range of asset allocation targets, he and his team could build portfolios out of whatever investment ideas they thought were going to make the best return on investment with the least amount of risk. He was the primary investment person, part of a team, but he ultimately was responsible for the decision on what was the best for the portfolio. Based on firm’s philosophy, portfolio is diversified well His firm believed: it should take a very long-term approach with investing; valuation criteria should drive investment decision, that portfolios should be built out of cheap investments, not expensive; and, in the importance of diversification in portfolio construction as it is a good risk mitigator that opens opportunities to other areas of the investment world that you might not otherwise consider. Philosophically, that is where Michael and his team were starting. At the time, his investment choices were diversified into such directions as domestic equities, international equities, emerging markets, many types of fixed income, commodities, master limited partnerships, and real estate investment trusts/ Expected win with big weight in cheap emerging market stocks Michael was satisfied. They had a large allocation to emerging markets, because in mid-2014, emerging markets stocks, relative to US stocks in particular, were about as cheap as they had ever been. They had a triple weight relative to targets in emerging markets, so they thought when things turn upward, it will be a big score and they will make a killing. Suddenly, with US oil flooding global markets, the price collapses But then in the second half of 2014, something terrible happened for Michael’s portfolios. It was the beginning of the United States’ flooding of international oil markets with increasingly more capacity, and the start of the realization of what US fracking was doing to unlock the massive amount of supply coming out of the country. So the oil price collapsed. The price of oil is inversely correlated to the US dollar, meaning that the dollar rose strongly in value. Commodities, emerging markets in portfolio make for triple blow So now he has two facts working against him. He has commodities in his portfolio (for diversification) and they are being crushed as the price of oil is collapsing. All the while, the dollar is strengthening, meaning all his emerging markets and other international investments are affected as in the value of currency in those offshore spaces is weakening rapidly, inevitably damaging his investments. Emerging market currencies were collapsing, because they were working inversely relative to the dollar. At the same time, China’s economic growth, which had been skyrocketing for years, was slowing a lot faster than people had expected. So you had emerging markets, currencies collapsing and China’s weakness putting even further downward pressure on their own currency, plus those of all of the emerging market countries that sold products and raw materials to China were not growing as much. Every investment class expected to be great in long term was ‘garbage’ It was the worst possible case scenario and it put him in a terrible position because everything that he had put in the portfolio that he thought would be a winning terrific long-term investment turned out to be absolute garbage for many years. He and his firm lost clients due to this bad performance and it was a situation that took a long time to recover from. He and his team were building portfolios based on what they had established as a long-term, fundamentally strong investment philosophy, but it was completely wrong. When clients leave as a result of bad decisions on his part, he said, it is extremely painful.     Some lessons Make sure you know where the next dividend is if you’re going to short a stock Currency risk can have a dramatic impact on your investment This is especially true if an investor has an excessive allocation or an overweight situation to portfolio contents that have a high degree of concentration of that risk. “I had a high degree of concentration of risk in currency, which I didn’t really fully appreciate at the time.” Don’t expect that over the long term currency will wash itself out, you may not have the long term. Risk is not always a linear trade off of more return/more risk Investors can take risk in excess of what is justifiable based on an unexpected return. Currency is a very real risk that does not exhibit a commensurate amount of expected return. Consider diversification even away from fundamentally sound targets This is because ordinary diversification tactics may not work all the time. Do research and understand momentum Avoid limiting research to whether asset categories are expensive or cheap. Go beyond and look at their momentum and fine-tune your asset allocation based on how they are performing. Then go with the positive momentum and avoid the negative. “We should more than happily accept risk for a commensurate amount of expected return. But we should avoid risks that don’t have a return that justifies taking that risk.” Michael Oyster   Andrew’s takeaways Understand your risk relative to factors rather than asset classes Stop looking at traditional asset class exposure and look at factor exposure Ask to what extent you are diversified? What are you missing? Investors may own stocks they may own bonds, and say they are diversified but they should also ask themselves more questions. Are you diversified from interest rate movement? Are you diversified from commodity movement? Are you diversified from currency movement? Try to separate your decision on currency from your decision on asset purchases The risk-return relationship of a currency is different from all other assets. Currency doesn’t provide a return commensurate with risk involved. https://valuationmasterclass.com/     Actionable advice Always ask yourself: “What can go wrong?” Be completely honest and objective and ask yourself what can go wrong? Especially early in your career. You get excited about an idea and you’re only looking at the positive outcome. The challenge is to see if you’re strong enough emotionally at the point to be able to ask this question. Sometimes you really have to force yourself to do it. But, if you can, then it can help you sidestep some of the pitfalls that many of us have stepped into over the years.   “Take the intellectual challenge, to be able to truly investigate what could go wrong. And I think, if you can do that … not only are you saving yourself potentially from this type of mistake, but you’re also strengthening your ability to analyze situations objectively, and that is a valuable skill.” Andrew Stotz     No. 1 goal for next the 12 months So in the next year, Michael is going to continue to tell the story of the fact that we are entering in a low-return world and how investors need to be objective about that and plan for it accordingly.     Parting words It is hard to look in the mirror and say, “I could have done better here.” Michael said that the strongest among us, who can survive in this brutal investment field and remain professional for any length of time, are those that look at their mistakes and grow from them.     You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Connect with Michael Oyster  LinkedIn Twitter Website Connect with Andrew Stotz astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned Michael Oyster (2018) Success in a Low-Return World: Using Risk Management and Behavioral Finance to Achieve Market Outperformance Michael Oyster (2005) Mission Possible: Achieving Outperformance in a Low-Return World   

David Stein helps individuals to become more confident investors via audio, video, and books. For the past five years, he has hosted the weekly personal finance podcast, Money For the Rest of Us. The show has more than 250 episodes and more than 10 million downloads. David’s upcoming book, Money For the Rest of Us: 10 Questions to Master Successful Investing, will be published by McGraw-Hill in October 2019. Previously, David was chief investment strategist and chief portfolio strategist at Fund Evaluation Group a US$70 billion institutional investment advisory firm, where he co-headed the 21-person research group. David’s former institutional clients include The Texas A&M University System, the University of Puget Sound, and the Sierra Club Foundation. He lives in Phoenix and Idaho.   “And so I started trading and quickly found that it’s not that easy.” David Stein       Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.         Worst investment ever David’s worst investment occurred during the transition period after he had quit the investment business and was trying to decide what he wanted to do in “retirement”. He had set up then shut down a few websites and had reached the point where he thought that even though he had retired, he could be a trader. He was experienced. At his prior firm, he was joint chief of investment researchers and money managers and trading was just part of what he and his team did, which included hedge funds and private equity. As his group’s head strategist, he would go to New York once a year and meet hedge fund managers, because he liked to see what they were thinking, to learn from their successes and mistakes and to see their take on the world. Visit to hedge fund piques interest in trading About a year or before he retired, he went to a commodities trading hedge housed in a Connecticut mansion. He met the founder and went to the trading floor. It grabbed his attention immediately. The floor was separated, with quantitative traders on one side and discretionary traders on the other. He said you could tell where the quants sat and where the discretionary traders say because the latter were messier and their desks less organized, but it looked like a fun and cool place to work. Then once he saw them at their desks trading, David got the idea that trading wasn’t that hard as he had had 15 years of investment experience. Trading turns out to be a lot harder than he had thought So a year after he quit his job, he decided to be a trader in commodity futures, currencies, options just to see how it would go. He knew enough to know that he would not be risking all his money into it, because he had known many people who had suffered huge losses in trading commodities. But he thought with his experience that he knew enough. He had economic models to use, and other investing tools, so he started trading and quite quickly found that it was not nearly as easy as he had suspected it would be. Some of the trades went well, and some didn’t. The problem he found mainly with commodities and foreign exchange (Forex), gold, silver, and other precious metals was the volatility. They trade almost 24 hours a day but it is extremely volatile, and there is no rhyme nor reason for that the volatility. Decides to stop trading but forgets to close one trade So he realized that there were things happening that were not at all like the investing he was used to. He had done fine, if fine is losing a little bit of money, but nevertheless he decided to stop trading. What he forgot was that he still had one trade in silver left open. It was a stop-buy order set up so that when silver fell to a certain price, the system would buy an open contract on silver that would go long on silver. He had neglected to close the position, so the trade went as intended: silver fell to the resistance point and the system trading bought him silver (set up to bet that silver would increase in value), but then silver kept falling. Before he realized what had happened, he had lost around US$25,000 in this particular silver contract. Good decisions are so due to processes not outcomes At this point in his story, David is reminded of Annie Duke, who in her book, Thinking in Bets, makes a distinction between decision outcomes and decision processes. A good decision, certainly a good investment decision, doesn’t happen because it has a good outcome, a good decision is the result of a good process, he related, para-phrasing Duke’s argument. He had not had a good process for buying commodity futures and trading because he didn’t understand what the market was like. He thought he knew enough about investing, how commodities work and economic trends, but he admits that he really didn’t. ‘You must know who’s buying or selling and the volume’ He also recalled a professional trader telling him that no one can successfully invest unless they have “border-flow information”. In other words, that the investor knows who’s buying, who’s selling, and how much they’re buying. Even today, the other thing one must ask when they invest: “Who’s on the other side of the trade?” “Who am I trading with?” Benjamin Graham wrote in his classic, The Intelligent Investor, that he was trading with individuals, and that most individual stocks were held by individuals, and so he could get some type of informational insight. In David’s commodities trading career, he said, he was up against institutions, and mostly quantitative “bots”, algorithms that can act very quickly. Sting comes from the fact he should have known better David also recalls a quote from The Wall Street Journal that if a hedge fund that trades in commodities thinks that their competitive edge is that they have a network of people who know what’s going on in terms of order flow, it’s a bit like saying you can deliver a package faster than Amazon. Like maybe you could at one point, but now you’re competing against robots, which excel extremely well in an environment in which there is no rhyme or reason to why things are moving. That’s what David learned. He came out of trading a little wiser, and kept his remaining $25,000. The sting certainly came from losing the money, but in some ways knowing that he should have known better stung more.   “(US$25,000) That’s not a huge loss, but it stung because of how I lost it. Annie Duke in her book, Thinking in Bets, distinguishes … a good investment decision isn’t so because it has a good outcome, a good decision is the result of a good process. And I did not have a good process for buying commodity futures and trading because I didn’t understand what the market was like.” David Stein   Some lessons No one should be trading commodity futures or Forex Such instruments are speculative - a speculation is when there is disagreement on whether the return will be positive or negative. Individuals should rather be focused on investing Investing has a positive expected return, with usually some income component or earnings component. The key is to focus on investing. It’s fine to have some diversification and speculative forays for hedging. But if individuals bet their retirement on trading, that’s insane, because it is purely speculative, and that means you have to get everything precisely right to make money.     Andrew’s takeaways What do you know that the market doesn’t know? Investors in individual stocks must ask themselves that crucial question. Most of the time, the answer is going to be: “Nothing!” It is insufficient to find a company or idea that you like; what is required is to find a company or an idea that you like that the market has failed to notice. Investing in commodities or Forex is extremely risky Such investing is tantamount to a bet against the balance sheet of the banks, a bet against the whims of politicians, and a bet against a central bank’s balance sheets. These factors are overpowering and can shift the market in a minute, which is frightening. When investing in forex, and something, you are definitely mean it, the Fed decides to do something, is there’s nothing you can do but respond to it. And that response may be that it crushes your portfolio. So is there anything you’d add to my takeaways from that?     Actionable advice Don’t be a trader But if you do, start off with a very small amount of money, and be prepared to lose it all, because trading is speculation. Use shadow portfolios, don’t risk real money Make sure you understand how it all works. Remember this too: If a person has or is a successful trader, they will not be teaching in a trading academy … they’ll either be working for hedge funds or they’re already retired and living on the beach somewhere. If someone is teaching other people how to trade, they are making their money teaching other people how to trade, they’re not making their money trading.     No. 1 goal for next the 12 months To sell enough books so he gets to write another one He enjoyed the writing process of taking five years of podcast episodes and distilling them into the best 60,000 words. McGraw Hill has given him an advance and he wants to go out to sell enough books that he can earn back his advance and do it again because it was fun to do.     Parting words “I just enjoyed being on your show. Thanks for having me.”     You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Connect with David Stein  LinkedIn Twitter Website Podcast Book Connect with Andrew Stotz astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned David Stein (for release in October 2019) Money For the Rest of Us: 10 Questions to Master Successful Investing Benjamin Graham (edited by Jason Zweign, Warren Buffett, 2006, first published 1949) The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) Annie Duke (2018) Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts  

Mario Nawfal is the founder of the Athena Group of Companies, a conglomerate that operates in more than 40 countries. He started in 2012 with $300 in the bank selling blenders door to door and built that into a business (Froothie) that generated $10m in its second year. Next he built global brand status with Optimum Appliances, a brand he created from scratch. Next he established a range of brands in niches such as personal mobility, fitness, and e-cigarettes. In 2016, he started GoGlobal, an incubator that helps businesses scale their product or ecommerce operations to more than 30 countries rapidly and efficiently.In 2017, he established International Blockchain Consulting (IBC), a network of experts in more than 40 countries that rose in less than a year to become an established industry authority in the rapidly growing blockchain and crypto space. After the success of IBC, Mario launched IBI Ventures (a venture capital fund), IBA (blockchain accounting), and IGC (cannabis and hemp business consulting). In 2019, he launched a new company, Zense, to provide entrepreneurs with insight on how to launch a successful business with a limited budget. Currently, he has created the 7Figure Launchpad, the world’s first and only full-access business program. “That’s when I realized that the person I had trusted to build my business and I was actually in discussion with to become the CEO, because I didn’t want to get too involved in my VC (venture capital) had just walked away and taken clients with him.”Mario Nawfal  Support our sponsor Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.   Worst investment everAfter e-commerce success, Mario looks at blockchainBack in 2017, Mario’s main enterprise was Froothie, an e-commerce business and an area in which he had expertise. But he was very interested in blockchain technology after looking at it for a while. He had free time, was travelling around Europe and started learning about the industry, mainly by reading to learn as much as he could and building contacts, calling people. With an assistant scheduling calls from morning until night, that’s what he would do day in, day out. One of the people he talked to was a Mr. “M”, with whom Mario started working, and who along with another gentleman, helped him start IBC. Mario knew how to start, build and scale businesses, but had no knowledge about blockchain, was not a developer nor could he write code, so he needed some experts around him.IBC starts well and grows to seven figures in six monthsWhile his businesses were doing OK, Froothie took a hit with a legal challenge over a supplier mishap. IBC was his next venture but he had to be careful as he couldn’t put in a lot of money. So he had brought on people working to build the business. It started out well and the experts he had brought on built the company as Mario was learning and pivoting when pebbles started to hit and testing different tactics to ensure they worked. He started doubling down and all this worked well to that point that IBC had scaled to seven figures in less than six months. So everything was going well, but he had forgotten to attend one of his main weaknesses - due diligence. Mario trusted people too easily.‘Trusted’ colleague earmarked to be CEO ‘disappears’Everything was going well, the company was going well, the company was scaling despite a few issues over delivery that he had to get involved in, but at the end of 2018, suddenly M. vanished. Initially, he was in hospital for a week and Mario was very worried, and sent messages to him and got everyone to send him wishes for a speedy recovery, and then he just disappeared and Mario had no idea what was happening. Then a payment in large six figures bounced from IBC’s biggest client, and they were unresponsive also. Even though some alarm bells were ringing in the back of his mind, he felt there was no way anything was wrong.Betrayal sinks inBut then when M completely disappeared, the facts of the betrayal started to sink in. Mario even sent him forgiving messages: “Don’t worry about what you did. I don’t know what you did. I’ll forgive you, it doesn’t matter man. You know, everyone makes mistakes, chasing money. It’s a game,” but the messages on WhatsApp were being read but ignored. The biggest client was still not responding and other clients M was close to were also concerned. M had been screwing Mario and IBC for a lot longer than they had initially thought. M had also bad-mouthed Mario to everyone he spoke to, including clients, team members and other partners. So that’s when he realized that the person he had trusted to build his business and was in discussion to appoint him CEO had just walked away and taken many clients with him.Hits keep on coming as industry also collapsesBut the story became even darker. He turned to his team to start taking drastic measures to rebuild after this loss. So they had to cut the company down rapidly. The industry was also going through a rough period and collapsed in the same month. Other businesses laid off more than 90% of their teams, and Mario and his team were ready for that. But they were not ready for a scam that went deeper.While rebuilding, staff discover second ‘snake’So there they were: seven figures in the red because payments were all meant to come in as one payment, key team members had disappeared, and they didn’t know how much damage was caused. So they started rebuilding. He got his team going again, riling them up, making inquiries as to who they could trust before they started calling customers again. One of his team, a confidante in the process who had been there since the beginning, and who was responsible for scheduling calls to key clients (“Bob”), had been very supportive. He would say: “We’ll do this Mario, forget about the pain you’ve gone through. Forget about M. He’s a snake. Now we’re family. We’re close to each other.” Mario recalled the day he started saying those things. “I’ll be there for you until we get through this. We’ll do it together.” And then Mario started filming himself and started blogging as a response to the scam that was by this time about two months or three months old.‘Nice guy’ was stealing data with GoPro videoThe same day Bob was saying nice things, Mario found out that Bob was still funneling data out of the company to M, and that M and Bob had been childhood friends. They were unable to steal in a normal way, because there Mario had put protections in place such as screen recorders and users couldn’t take screenshots nor could they export data via a drive because the company would know. So Bob was wearing a GoPro and working and filming as he was working, and as IBC were about to close clients, none of them were closing and it had been a huge mystery. All the clients that they knew IBC had spoken to and were about to close, Bob was just talking to them and funneling them to the M’s other company. While Mario and his team were trying to recover, they were actually losing more clients. So Mario sacked Bob even as more stories emerged about how deep the damage had been and how many had been misled.Head tumor discovered as legal battle continuesIn the same month, Mario was diagnosed with tumor, while non-cancerous and not serious, it was in head initially he thought he would need immediate surgery because of associated bleeding. His other company meanwhile was dealing with a legal crisis in which one of the suppliers had breached their agreement due to patent concerns and that was pretty serious also. It was a very tough period but Mario managed to bounce back. IBC is now stronger than ever but it took a very stoic mindset to get through it all. Once the last rotten apple in the company had been removed, and all leaks were patched, IBC started to make money again.  Some lessonsThe people you hire will make or break youThorough due diligence must also be applied to hiring people, because hiring is the heart of any business, where an investment bank or a restaurant that needs waiters or chefs. The more due diligence you do, the more likely that luck won’t play a big role because you’ve done the work to make sure you have the right people to build your business.All investors ask about your teamThey look at the team more than the idea over every time, so again, due diligence in hiring is crucially important.  Andrew’s takeawaysWhen it rains it poursAs Mario had so many struggles going at the same time, with one team members’ betrayal and another’s, fighting a lawsuit, and serious health issues, one thing Andrew likes to highlight is that most young people going into the business of being an entrepreneur do not realize that having a business is your complete life. Having a serious physical issue on top of that can throw all plans out the window. So to be an entrepreneur, you’ve got to have endurance and the energy to relentlessly pursue your goals. This is critical especially when unpredictable things happen.“When it rains, it pours and you’ve got to push through it.”Trust can only be built with timeThere is no way to accelerate the trust between two people except through time.Six common mistakesCollated from the My Worst Investment Ever series, the six main categories of mistakes made by Andrew’s interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Andrew identified mistakes No.2 and No.4No. 2 Failed to properly assess and manage riskUltimately, it was the risk that affected Mario’s business, not the success. The story of the return actually sounded very good.No. 4 Misplaced trustMario is not the only one struggling with this. When an investor or a business person is in a situation where they really need a person, and they go ahead and work with them, the trust part is the most difficult. Actionable adviceKeep in mind when there is a lot of money at stake, when you get to that level, if you’re an investor, or you’ve got successful companies, be very careful about the people that are making the decisions with that money, because their incentives may not be aligned with yours.Greed is very powerful and people will come up with stories to justify doing the wrong thing when it comes to money – Greed is a very strong bias.  No. 1 goal for next the 12 monthsMario wants to find people to run his various companies, “but the right people”. Mario’s response to this story is not to retreat and be a hermit, and do everything himself because to avoid being scammed again because such things will often happen anyway. They are part of business. Instead, he wants to look logically and find partners through doing proper due diligence and continue to build companies. Right now his focus is on IBC, which is helping businesses to raise capital.  Parting words“Anyone listening to this, you will lose. The way you respond to that loss will determine what happens next.” You can also check out Andrew’s books   How to Start Building Your Wealth Investing in the Stock Market   My Worst Investment Ever   9 Valuation Mistakes and How to Avoid Them   Transform Your Business with Dr. Deming’s 14 Points  Connect with Mario Nawfal LinkedIn Website (Athena) Website (Personal) Instagram Medium YouTube Email Connect with Andrew Stotz Astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast  

Lex Sokolin iLex Sokolin is a futurist and an entrepreneur focused on the next generation of financial services. He is the global fintech co-head at ConsenSys, a blockchain technology company building the infrastructure, applications, and practices that enable a decentralized world. Lex focuses on emerging digital assets, public and private enterprise blockchain solutions, and decentralized autonomous organizations. Previously, Lex was the global director of fintech strategy at Autonomous Research (acquired by AllianceBernstein), an equity research firm serving institutional investors, where he covered artificial intelligence, blockchain, neobanks, digital lenders, roboadvisors, payments, insurtech, and mixed reality. Before Autonomous, Lex was COO at AdvisorEngine, a digital wealth management technology platform, and CEO of NestEgg Wealth, a roboadvisor that partnered with financial advisors. Prior to NestEgg, Lex held roles in investment management and banking at Barclays, Lehman Brothers and Deutsche Bank. Lex is a contributor of thought leadership to The Wall Street Journal, The Economist, Bloomberg, the Financial Times, Reuters, American Banker, ThinkAdvisor, and InvestmentNews, among others. He is a regular speaker at industry conferences such as Money2020, LendIt, Schwab Impact, In|Vest, T3 Enterprise Edition, and Consensus. He earned a JD/MBA from Columbia University and a BA in economics and law from Amherst College.   “The good news is that I didn’t have any money, or whatever money I did have I put into some discounted Lehman stock thinking these guys knew what they’re talking about. And if there’s so much confidence, and they have such fancy suits, and they get paid so much, this thing’s got to … go up. And of course ... it didn’t go up, not at all, not in any way whatsoever, it just went down.” Lex Sokolin, on his time at Lehman Brothers in 2007     Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Fresh graduate joins Lehman Brothers analyst program The year was 2006. Lex had just graduated from his undergraduate degree in economics. It was still cool to work in finance. He joined the Lehman Brothers’ analyst program alongside 40-50 people when the brand was very strong. His intake were young kids out of school, and associates. They were starting at the investment management division. One of the orientation activities was a stock-picking contest in which new staff had three months to generate the highest returns in a no-risk setting. Wins stock-picking contest just as big banks start to fail He won, which did amazing and damaging things for his ego. He was on top of the world as he had bested Stanford and Harvard people, and was on the road to success. It was now 2007. Bear Stearns appeared to be failing and collapsed shortly afterward. Rumors were circulating that the big banks had a lot of bad debt on their balance sheets and that they couldn’t meet their obligations. A liquidity crisis was looming and Lehman was in the crosshairs. Staff 401K packages are matched in Lehman stock At the time, Lex was in this investment management business and the Lehman price was around US$120 per share. Then it started to fall. It halved its value to 60. Then it plunged to 20 and Lex remembers that day. There was a strong corporate culture at Lehman Brothers. The corporate color was green so people would say everybody leaves green because everyone’s on the same team. So managing directors got paid in Lehman stock as a percentage of their accomplishments. Analysts such as Lex were matched in their 401K plans in stock. If you saved $10,000 you would get $10,000 in Lehman stock and nothing else. Also, staff could buy more stock at a 20% discount. Gordon-Gekko type invokes team spirit, tells staff to invest in Lehman stock So Lehman stock was $20, and it had been falling for months. Lex watched as the New York branch manager, an 80s throwback with Gordon Gekko suspenders and haircut, was saying that the stock price was ridiculous and that it had never been so cheap, so he was directing staff to buy more Lehman stock. Mr. Greed is Good was among people managing $80 billion in that business and another $200 billion in an adjacent business. Lex was 22 so seeing such experienced people made him think it was a good idea. The good news was that he didn’t have much money, because the stock never recovered and due to politics and personal animosity, and the devious dealings of Goldman Sachs, the whole company was the only one not saved by the bailout or takeover deals. Lehmans went to zero. Lehmans alone was left out in the cold Merrill Lynch also collapsed, but it was taken over by the Bank of America. So it didn’t go to zero. Bear Stearns had collapsed earlier but it was bought by JP Morgan. Lehman was the example for the whole world of learning how to be punished, and seeing the destruction of wrong balance sheet construction. Lehman was not a worse business than Merrill, it was a better business than Merrill, and it was not a worse business than Bear Stearns. What however happened was that when it was time to talk about a bailout, all the people in the room, from the treasury secretary to all the other banks, every single person had been a Goldman Sachs (GS) employee. 401K matching also went to zero also So Lex’s retirement package also matched Lehman’s and went to zero. So as a young analyst who was really good at virtual stock games none of the outcome was part of his decision process and was not something he knew. So understanding that this was not an exception, that the world is defined by these edge cases, that the whole thing is just these edge cases, was an extremely valuable takeaway. While he lost everything he had at the time, in the long horizon, “things turned out quite all right”.   “I was a super interesting moment, I am so incredibly grateful for having that early in my career, you know, two years into my career, because I saw everything from the behavioural biases that people have about the places where they work, the problems of over indexing and to one particular security, and then more than anything, you know, like idiosyncratic risk that you really can’t predict.” Lex Sokolin     Some lessons Overconcentration in any position exposes you to great idiosyncratic risk This is the kind of risk that you cannot create a model for, nor can you have any good sense for it, because it is unknowable. Diversification in portfolio construction is the answer Build a portfolio without overexposing yourself to any particular holding – diversify. If you’re doing a barbell strategy, make sure the other side of the barbell is really conservative, so if you one of your positions fails, it doesn’t harm your portfolio in a big way. People are not reliable sources of information Most of the time the information you’re receiving from other people is based on emotion. They might dress it up in technical language, but it’s not useful information. It’s just how they feel.   “So understanding that this (Lehman’s collapse) was not an exception, that the world is defined by these edge cases, that the whole thing is just these edge cases … was a majorly valuable takeaway.” Lex Sokolin     Andrew’s takeaways Benefits of diversification Risk disappears or reduces very quickly, in the beginning as you start to blend stocks together. “Diversification is the seat belt and blending in some sort of other instruments, such as bonds for example, is the airbag.” Common mistakes Collated from the My Worst Investment Ever series, the six main categories of mistakes made by interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Misplaced trust Particularly for young people, you see senior financial experts managing billions of dollars, and you think: “This guy’s got to know.” Andrew always says, everyone’s ultimately making it up, this man or that woman just has a lot more experience making it up than others, and maybe has some great experience in risk management or another area. It’s hard to rely on humans to give you great information It’s also hard to rely on machines, or charts or data, to give you correct information     Actionable advice Figure out what know that you know and what you know that you don’t know Everything flows from that: the selection of your investment philosophy, the selection of your risk tolerance and your ability to put money to work. Figure out your goals for the financial planning you’re doing. Ask yourself the following: Why are you investing? What are you trying to get out of it? How are you going to behave when different scenarios play out in your investment’s performance? What kind of investor are you? Do you need help? Do you want to delegate that to somebody who will make you feel more secure and give you a smarter overlay? Or do you want to do it yourself?     No. 1 goal for next the 12 months Lex at ConsenSys, one of the largest blockchain technology companies in the world, is focused on the tokenization of securities and the “connective tissue” between the traditional financial world and the world of digital assets, crypto assets, and how the two connect through platforms and software. So he’s trying to build some cool tools for people to get access to financial instruments that historically they either didn’t have enough money to do or was just too difficult to get involved with. It’s a very interesting opportunity because there has been a lot of pushback recently against cryptocurrencies at every level.     Parting words If listeners would like to keep up with some fintech news and developments, Lex invites you to check out his Twitter or follow him on LinkedIn for his newsletter.     You can also check out Andrew’s books   How to Start Building Your Wealth Investing in the Stock Market   My Worst Investment Ever   9 Valuation Mistakes and How to Avoid Them   Transform Your Business with Dr. Deming’s 14 Points  Connect with Lex Sokolin LinkedIn Twitter Website Email Connect with Andrew Stotz Astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned Harry Markowitz (1971) Portfolio Selection: Efficient Diversification of Investments   s a futurist and an entrepreneur focused on the next generation of financial services. He is the global fintech co-head at...

Suresh Mahadevan is the CFO of SureCash, a fintech firm in Bangladesh. Prior to that he was group CFO at Digiasia, an Indonesian fintech firm after spending close to 12 years with UBS bank in leadership positions in Hong Kong, India and Singapore, working in the Asian equities business. Suresh has been an angel investor for the past four years, participating in more than 20 investments. He also advises several start-ups on strategy, culture building and fund raising. He has an MBA from Columbia Business School, a post-graduate diploma in management from the Indian Institute of Management (IIM) Calcutta and an undergraduate degree in electrical engineering.   “We have tried raising a lot of money … the company’s out of cash and I have no other option but to close the company.” Email to Suresh Mahadevan from solo founder     Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Suresh ventured into angel investing around four years ago, driven in part because his employer UBS, a large investment bank dominant in Asia, decided to ban staff from investing in listed stocks anywhere in the world, at any time. So what could he invest in? UBS said he could invest in ETFs and private companies. So that interested him and he started researching them. Angel investing target tries to harness India’s other religion – cricket This worst investment ever story centers around his third bid at angel investing, which featured his other passion (more or less India’s No.1 passion), the game of cricket. So the company he was looking at was a would-be unicorn market entrant - a fantasy sports betting app. The way it planned to make money was to let people to pick up their own teams with a mix of players from any teams. Then people could put money behind their teams. Depending on the performance of the individuals, you could get a big win if you picked all the right players. So the model was simple. The company collected all the prize money and distributed 80% of it. Fantasy cricket app was to be first of its kind In India, cricket is like a religion and Suresh had followed it closely for at least 40 years, so he was very attracted to the idea. The company was a software operation that built an app to allow subscribers to bet money on the people they picked, and they would strongly advertise this as a game of skill, not a game of chance. If a person has followed cricket or baseball for years, then they know who to pick based on the prevailing conditions. So having been an ardent fan of cricket, this was a big factor in why Suresh got excited about the company. Invests US$100K as noted cricket personality is solo founder What also excited him was 11 or 12 years ago, there had been established an Indian Premier League, professional Twenty20 cricket contest called IPL, and it was a big success. On top of that, the solo founder was highly qualified; he had been to all the right schools, the best engineering school, the best management school, and was a prominent cricket celebrity with millions of followers. Suresh consulted friends in the sports content business, who said Suresh was onto a great idea and also wanted to invest. Suresh felt he was looking at a once in a lifetime opportunity so he put US$100,000 into it, without sufficient due diligence. It was also early days for his angel investing career. He believed that such an astute and market-making play on cricket popularity in India couldn’t lose. ‘I forgot to tell you, he’s bad with numbers’, the first of many red flags Suresh signed up and introduced many friends to the idea, and they also invested. But the first warning signal sounds was when the very friend who had introduced Suresh to the founder said: “Hey, by the way, I forgot to tell you, this guy’s not great with numbers … he’s such a great guy. But his number sense is a little wanting.” Suresh said: “Why didn’t you tell me this before?” Another thing Suresh noticed was that the founder used to visit Singapore regularly from India and he was always smoking and drinking. Suresh gently asked him about his health, as he was thinking this could be a matter of serious “key-man risk”. With so much riding on one man, there was danger he could become seriously ill or die on the job. Another red flag was the founder’s lavish lifestyle: he liked to ski, always stayed at expensive hotels, and would pay $15 for a gourmet coffee when a $5 Starbucks would have sufficed. Suresh started wondering if he was funding this guy’s luxurious tastes. Excessive personal and business spending ‘didn’t matter’ to founder Suresh eventually called him on his spending, but the guy fobbed him off, saying these things didn’t matter. Another strange thing was the founder wanted more introductions and he was constantly fundraising. Another problem with the business was that it was very seasonal, of course, being focused on cricket. So a lot of people were invested in this company, introduced by Suresh, which in the end was a source of embarrassment. Things went on like this for a couple of years. Then it dawned on Suresh that the company was failing to make substantial progress. He adds that the problem with start-ups is that when things are going wrong, the founders don’t communicate much and this guy wasn’t talking about problems, but was just asking for more introductions (and more money). Realizes that business is not on solid ground Finally, Suresh realized the business was quite troubled. This awakening came after another red flag that was very worrying. Whenever he asked the founder about the whole business plan, the founder would dodge the question. Suresh had also been meeting companies that were interested in buying the company outright. The founder refused, saying his venture was a unicorn that was going all the way to the top. Suresh said he has come across this many times: The Founder’s Ego! So after three years or so, Suresh received a nice email saying: “Hey, we have tried raising a lot of money. The company’s out of cash, and I have no other option, but to close down the company.” There was a well-funded competitor, which was now the real “unicorn” in the market, constantly advertising on television and was now very famous. So the newcomer became the winner who took it all and they took everything. The founder had run out of cash and ended up winding up the company.   “What had happened was clearly there was a very well-funded competitor, which was now the real unicorn, which was constantly advertising on television (a company called Dream 11) and was now very famous. So they became … like a winner who takes all and they took everything, because they were well funded and could do the customer acquisition.” Suresh Mahadevan   Some lessons Opportunity cost Be wary of investing with founders for whom the opportunity cost is high. Some founders think everything can be solved with money. Competition is always here or will always emerge The founder of this enterprise failed to put much thought into competition, at all. Do your due diligence on everyone involved This is especially true when your target company has a solo founder. This founder and his employees were taking regular salaries at high rates, and were not acting like careful people involved in a start-up. Be especially wary of lone founders They tend to become delusional. In Suresh’s portfolio of companies, the few that have not gone to zero but are not doing well are run by solo founders. Part of their delusion is that they externalize failure and fail to look inward. But, after these experiences, he has totally refined his investing process. One method he uses is that if he likes a founder, he gets a lot of other people to look at them and their business, for objectivity. Never dismiss red flags In Suresh’s story, the founder was not taking care of his health and this was an obvious red flag. Another was the lone wolf staying at fancy places the luxury of which was unnecessary and unwise.     Andrew’s takeaways Collated from the My Worst Investment Ever series, the six main categories of mistakes made by interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Investing in start-ups (N0.6) is a very high-risk venture When you invest in a start-up, it is such a high-risk activity that Andrew usually recommends against it. Doing business with or investing in friends’ enterprises doesn’t always work, but it can work. It doesn’t always work with family, but it can work. Some people can truly earn our trust through good performance over a long period. Handy model to assess start-ups TIEM: Trust - Idea - Execution - Money Anytime Andrew looks at investing in a start-up situation, he applies this formula. Trust: The first question he asks is: Do I trust this person? Trust is only built over time, it’s very hard to walk into a new situation and say “I trust this person” If there’s no trust from the start … STOP. Idea: Is it a good idea? If it is not … STOP. Execution: Can this person or team execute on this idea? There’s a huge difference between the type of person who can come up with an idea and the type of person who can execute on it.  Part of Jen’s story was that her team started missing deadlines. They lacked the ability to execute the plan. Money: If you don’t have money, you’re not going to get there. So you’ve got to have the runway that money provides. In Suresh’s case “I think this one (company) really kind of broke down at the point of execution.” Andrew Stotz Financial professionals can be overconfident about own investments When talking to clients and advising clients, usually professionals put in a lot of care into the research done into the suitability of a particular investment on behalf of their client. But sometimes they throw that out the window when they’re looking at their own ventures. Things can get overlooked.     Actionable advice Search carefully into the character of founders or entrepreneurs Nowadays, Suresh spends a lot of time and effort in getting background and character checks done on founders, through multiple references. This includes going to consumers of their past products or services. The character of the founder is key in terms of his opportunity cost, even behavior such as reputation for doing the right thing. Be even more wary of sole founders Suresh is even more cautious when he is looking to invest in a business with a sole founder. Of the 24 angel investments he has participated in, three have not done well; one has gone to zero, two will probably go to zero in the next few quarters; all of that trio are sole-founder-led businesses. Suresh has found the common theme is that they tend to completely blame everything else except themselves.     No. 1 goal for next the 12 months Suresh recently joined Bangladesh fintech company SureCash, and it’s purpose is very involving for him because it’s built on financial inclusion, as it is helping the government distribute money to mothers of primary school children. Over the next 12 months, he really wants to build a great business that helps improve the lives of people and creates value for the venture’s shareholders.     Parting words Angel investing is great because it helps companies and ideas to launch, but one thing Suresh wants listeners to remember is that is it the most illiquid investment you can ever make.   “If you have college fees to pay for … (or you are) sending them to expensive private schools, don’t put that money in angel investing.” Suresh Mahadevan       You can also check out Andrew’s books   How to Start Building Your Wealth Investing in the Stock Market   My Worst Investment Ever   9 Valuation Mistakes and How to Avoid Them   Transform Your Business with Dr. Deming’s 14 Points  Connect with Suresh Mahadevan LinkedIn Twitter Connect with Andrew Stotz Astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast  

Jen Greyson is one of the top eight women in crypto and is a genius at failure. She’s currently running co.co, a start-up that’s the Airbnb of office space, speaks internationally on topics ranging from AI to being a female tech founder and knows the struggle of being a working parent through the longest summer.   “I should have left sooner, I would have still prospered like I did had I left when I knew I should leave. I stayed because of my investment, because of my sunk costs. I stayed longer than I should have. If I would have trusted myself when I knew I needed to go it would have been much more beneficial.” Jen Greyson   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Chance meeting with computer engineer on an AI quest About four years ago, Jen had built the perfect life for herself. She was a new single mom, was ghostwriting for an amazing client that she had had for a few years and worked one day a week. She would go hiking with her dog and had a great home on a lake. Then she met a captivating computer engineer who was into AI. Over long lunches she would hear from him about virtual reality, AI and other things she thought only existed in science fiction. His goal was to build artificial intelligence “for good”, to create a level playing field so that some young person in Switzerland who wants to use AI to complete a college exam has the same chance as a CEO working for a Fortune 100 company that can afford to pay a huge AWS bill. Drunk on idea’s Kool Aid The more she started looking into the idea, the more she liked it. She offered to help with his writing really wanted to be a part of the process because it was world-changing. She was also newly divorced, had a lot of freedom and was financially doing well. So she dug into his business plan and her business brain kicked in. She had run some big businesses but had left corporate America never wanting to return. He suggested one afternoon: “You should come run my company for me.” And at this point, she was fully wrapped up in the idea, “had drunk the Kool Aid” and was really excited about it. Writer becomes investor and CEO to re-invent corporate world While not wanting to get back into her pantsuit, the idea of reinventing the way corporate structures worked appealed greatly. So even though she would be running this company, it was a start-up and they would be doing it on the global stage using crypto. That community was very welcoming and she saw the potential of the project and the potential to have an impact on small businesses, through neigborhood stores to college kids, and other players who really needed AI could have it. She had some money saved and the engineer didn’t but she decided to back the idea because she believed in it. They had a good plan in place, as with every start-up in the beginning. And the thinking, as with all new businesses is, in 90 days they would be rolling in money. Jen agreed to bridge the company us for 90 days and took out some loans. Costs sink in as deadlines pass and pass After the 90 days, they had some momentum so Jen decided to bridge the company for another 90, and another 90, and another 90, and we ended up raising some money from some other people. But, it started to go badly. Targets were not getting met, things were not getting done, sections of the project were not getting coded. It was her first experience with software development and she was really having to rely on his expertise. But she was also relying on her own expertise in running the business. She knew very well about deadlines and managing people and projects and making sure that what they promised, gets delivered. Major complications hit They started having many major complications and Jen as CEO held the fiduciary responsibility. She started feeling uneasy about what their investors were getting out of the deal and that her partner was wanting to start raising more money. She also felt bad about the risk she was taking because the SEC was really starting to look at crypto projects but the regulations were opaque, which meant risk. She was having conversations with lawyers around the world and in-house to navigate the regulation landscape. And Jen was personally committed to the tune of US$150,000, which made decisions difficult to make as a CEO without thinking about the money she was risking or that she had committed. Mentor asks hard ‘zero-based thinking’ question She was making decisions that might have been different if her money was not at stake. She met a mentor and, while she didn’t want to give up on the project, needed clarity. She had invested in it, believed in it, and truly wanted to have an impact on all those lives. The mentor asked her: “What would you say to a CEO in your position if you were coming on today as an advisor?” She was rocked, but it allowed her to look at the loss as a sunk cost and that that money was truly gone, never to be returned, and to ask herself what decisions she needed to make today? Jen left with ‘unattached’ view and resigns She left that meeting able to separate herself from the disappointment, the hurt, the anger at herself and to unemotionally, unattached, look at the situation clearly. It then made the next decision easy. She handed in her resignation and that was the end of it, except that she learned a lot of amazing things, and now considers it her “most brilliant failure” for sure.   “What would you say to a CEO in your position if you were coming on today as an advisor?” Jen Greyson’s mentor     Some lessons Live a life with no regrets Look at every situation as a learning opportunity Always get everything in writing Always assume a start-up is going to go bad Always have an exit strategy You must have a plan for when the start-up goes really bad. Be close with the others in a start-up Have a relationship with the people you’re going into business with or only work with people who know how to communicate and with whom there is mutual respect.     “Anytime you start a business with someone, it’s all unicorn farts and rainbows … Everything is glitter and beautiful and wonderful. And then, like any relationship, it gets hard and the honeymoon ends.” Jen Greyson   Andrew’s takeaways Collated from the My Worst Investment Ever series, the six main categories of mistakes made by interviewees, starting from the most common, are: Failed to do their own research Failed to properly assess and manage risk Were driven by emotion or flawed thinking Misplaced trust Failed to monitor their investment Invested in a start-up company Investing in start-ups (N0.6) is a very high-risk venture When you invest in a start-up, it is such a high-risk activity that Andrew usually recommends against it. Doing business with or investing in friends’ enterprises doesn’t always work, but it can work. It doesn’t always work with family, but it can work. Some people can truly earn our trust through good performance over a long period. Handy model to assess start-ups TIEM: Trust - Idea - Execution - Money Anytime Andrew looks at investing in a start-up situation, he applies this formula. Trust: The first question he asks is: Do I trust this person? Trust is only built over time, it’s very hard to walk into a new situation and say “I trust this person” If there’s no trust from the start … STOP. Idea: Is it a good idea? If it is not … STOP. Execution: Can this person or team execute on this idea? There’s a huge difference between the type of person who can come up with an idea and the type of person who can execute on it.  Part of Jen’s story was that her team started missing deadlines. They lacked the ability to execute the plan. Money: If you don’t have money, you’re not going to get there. So you’ve got to have the runway that money provides. CEOs may be risking everything Normally what people say is: “I want the CEO to have skin in the game. I want the CEO to be aligned with the other shareholders and the other investors.” But the reality is that for CEOs, sometimes it’s all of their capital. Meanwhile others are investing perhaps just 1% or 5% of their total capital so the way they think is very different. I never thought about that. Zero-based thinking is a valuable mental tool It can be applied to any part of life, even apply to relationships. Knowing what you know now (about this enterprise or relationship or job) would you still get involved with it if you just encountered it now?   “If the answer is yes, awesome, keep building it. If the answer is no, that’s very valuable information.” Andrew Stotz     Actionable advice Trust your gut Jen says she should have left sooner and stayed longer than she should have. Set deadlines and set solid repercussions for when they are not met   No. 1 goal for next the 12 months Jen is 100% thrilled about her current start-up, mostly because he has some great partners. She’s excited to see that starting to change lives and is committed to creating spaces where people can work. “Each of us can start changing the world.” As a mother of two boys, she always I always want amazing things to happen for them. And so I'm excited to see what they get to accomplish in the next year.   Parting words Every failure has a lesson, and learn it the first time, or the lessons will get bigger, harder and bloodier.     You can also check out Andrew’s books   How to Start Building Your Wealth Investing in the Stock Market   My Worst Investment Ever   9 Valuation Mistakes and How to Avoid Them   Transform Your Business with Dr. Deming’s 14 Points  Connect with Jen Greyson LinkedIn Twitter Website Amazon Medium Facebook Connect with Andrew Stotz Astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast  

Douglas Tengdin, CFA, is the chief investment officer (CIO) of Charter Trust Company, where he has worked since 2000. He graduated magna cum laude from Dartmouth College in 1982, and received his CFA Charter in 1992. He was the founding president of CFA Society Vermont and remains an active volunteer with the CFA Institute. His first job in the investment industry was as a mail boy and securities runner in 1974. He has also worked as a bond trader, currency trader, mutual fund portfolio manager, bank treasury analyst and manager, and private wealth portfolio manager before becoming a CIO. He began to produce a monthly market commentary in 1993, and started blogging in 2007. His daily blog is called the Global Market Update and he produces a one-minute podcast and radio spot that accompanies it. He has been married for 35 years, has six children whom he and his wife have homeschooled, and is active in church and outdoor activities. He currently lives in Hanover, New Hampshire, with his wife, their youngest son (about to enter college), and his mother-in-law.   “The government can take anything away. They’re not predictable. You may think you have a way of predict them but they’re not.” Douglas Tengdin   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Douglas says his story was not as much a terrible investment as it was memorable. It was 1988 and he was in his late 20s and a bond trader for a mid-sized US bank. He sat on a desk with other bond traders, and bought and sold United States Treasury securities during trading day hoping to speculate on price movements, which are relatively random on any particular day. He had built a lot of financial models, without all the great software we have today, just Lotus 123 spreadsheets, but he had created a lot of them, and they have macros built into them and macros that built other macros, and they were continually processing the price activity, looking for clues. Built models used to help his bank trade in treasuries He had had considerable success with these models and had been hired to help manage the bank’s Treasury department. He was then invited to do the same thing for the traders and so he started doing that and making predictions. Then his leaders suggested he put a “paper portfolio” together to see what he could do, so he used his models and put the paper portfolio to work, with some success. Bank puts him trading real funds and he makes early wins Then they put him to work trading live funds (real money). He was invested in two- and five-year treasuries. He would buy and sell those securities, going short or going long, but he would always be ahead by trading day’s end. Suddenly, Greenspan’s Fed raises discount rate He remembers the day well. It was August 1988. The market had recovered from the 1987 crash, and the economy was moving along. There was speculation about the future of oil prices, which had crashed in 1986 and they were starting to climb out. There were of course doing okay. But there were always “squiggles and giggles”, always turnarounds. So he had purchased the four-year Treasury bond, had watched the price move up and it was close to his return target, when the Dow Jones newsprint machine sounded three “dings”, which meant there was a news item. Immediately following that alert, the machine dinged twice, which meant the US Fed has raised its discount rate. Modest profit in four-year Treasuries turns to big loss Alan Greenspan was new to the Fed, and at the time the central bank was engaged in a policy of “creative obfuscation”. So he had been chairman for a year looking at the economic landscape and instead of adjusting monetary policy through the Fed funds rate, or through the money supply, which was what they were doing at the time, they occasionally changed the discount rate. That was a surprise. And his modest profit in the four-year Treasury turned into a more than modest loss. He recalls seeing that happen and thinking: “How can they do this? Don’t they know that I’ve got a financial model that’s working and it’s working really well.” Besides that, it was the first part of the month and he yet to have his monthly profit and loss statement made. “And my modest profit in the four-year Treasury turned into a more than modest loss. And I remember seeing that happen and thinking, ‘How can they do this? Don’t they know that I’ve got a financial model that’s working and it’s working really well.” Douglas Tengdin   Trader has severe instant emotional response Mind racing, brick in the stomach, wind sucked out of his lungs, numbness in his limbs. All the issues at hand flashed through his mind. The thought of being in the hole despite his risk-controlled position in four-year Treasuries to the tune of US$4 million made him feel like a brick had fallen to the pit of his stomach, the wind was sucked out of his lungs, and he felt number in his limbs. All this and it could have been worse. He had not lost someone’s retirement savings, he hadn’t risked his institution’s capital, it was not a massive loss. But it was a very memorable moment. Despite all planning, the news, especially government action, can destroy you What was striking to Douglas was that despite all kinds of planning, all kinds of models, all kinds of fancy algorithms to understand what was happening, the news can and did hijack him and it can happen immediately. This applies particularly to the government, which has unquestionably a massive responsibility regarding monetary policy, financial policy and fiscal policy. They play a huge role with every modern economy. The government can change what it is doing and announce a change, and that announcement can have massive and instant effects on your financial position. Position closed but colleagues cheered him saying ‘it’s early in the month, you can make it back’ Douglas closed the position right away and watched it. If he had the insight and experience to reverse it, he would probably ended up positive on the day. But someone told him once that “your first loss is your best loss”. He simply looked at the market to try and understand what the next dynamics were. The next dynamics were going to be price down, which followed through that day. The next day, he took a short position and started earning his way out of the hole that he had made. Some of his friends in the market said: “At least it’s early in the month, Doug, and you’ll have a chance to make it back for your monthly book. And they were right.” “Someone told me once that your first loss is your best loss.” Douglas Tengdin   Some lessons The government can take anything away It is not predictable and you may think you have a way to predict it, but you can’t. Size matters Douglas’ position size was manageable, and he hadn’t taken an outsized position and for that reason he was able to earn it back. We don’t know the future We invest based on forecasts, but we have to be humble about those forecasts and remind ourselves continually that we don’t know the future. If you think this will never happen again, get out of investing As the disclaimers say: “All investment carries risk.” As Douglas said: earlier, we simply don't know the future, there's all kinds of things that can happen.   Andrew’s takeaways That’s the way investing goes One thing an investor can say ask themselves is “how can I structure my next investments so I will not be exposed and this will never happen again”. The answer to that is such a structure would cost so much in costs or possibility of return that it would never make sense. So sometimes, you just have to be prepared for these types of losses. Sizing your position is protection again major loss Douglas was protected against devastating loss and could even recover his losses by the end of the month because he had sized his position modestly and carefully. On top of damaging notices, governments can also lie or mislead Be very careful if an investment case you’re making is reliant upon the government Case in point: During the Asian financial crisis in 1997, the epicenter of which was in Thailand, the government was announcing its foreign exchange positions, and people in finance thought it had US$40 billion. But it was not disclosing the forward transactions that actually, once unwound meant that in one day in March that 40 billion fell to seven. And then it was only a couple more months in the end of June, beginning of July, it said, okay, there’s no more money.   Actionable advice Douglas has a phrase on his wall that he created: “Diversification is the compliment that humility pays to uncertainty.” He says people have to humble in this business, because if you’re not, the markets are going to humble you, so you have to diversify because the future is uncertain. The future is indeterminate and that’s the case because the news is indeterminate. The answer to uncertainty is diversification Time diversification - in terms of spending, you have different maturities, you have different aspects of the bond market you might be involved with, there's Position diversification by sizing is incredibly important Mental diversification using different approaches to the marketplace to assemble a portfolio.   No. 1 goal for next the 12 months To continue to in the marketplace to prepare ourselves for the next downturn The time to prepare your portfolio for a downturn is before the downturn happens, so while there are trade echoes of difficulty, the time to prepare your portfolio is now when things are still looking alright.   Parting words We can’t control the future. We can only control what we’re doing now (to be ready for an uncertain future).     You can also check out Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr. Deming’s 14 Points Connect with Douglas Tengdin LinkedIn Twitter Twitter (Global Market Update) Website Blog Connect with Andrew Stotz Astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast Further reading mentioned Peter Bernstein (1998) Against the Gods: The Remarkable Story of Risk