The Only Source of Knowledge is Experience

One of the greatest values we can offer our clients at CJM is the three decades of experience I have working in the financial services industry, and having now lived through six bear markets.

Early on in my career, in 1999 while at Merrill Lynch, I learned one of the most valuable and expensive lessons on investing. It’s a lesson that has stayed with me ever since, surrounding a mistake that I never intend to make again. Please stay with me, and you will see the relevance, and how this story relates to where we are today.

In 1999 I inherited a client who invested $750,000 into Microsoft two years prior, in 1997. We developed a nice relationship together, and I came to learn that the reason he left his previous advisor was because he would only look to invest in “boring” as he referenced them, value stocks. Whereas all us young “studs” at Merrill understood this was a different era – where tech ruled, and unless the stock symbol had four letters in it, we didn’t buy it. Meanwhile, the old guys in the back, with the nice offices only wanted to buy these “boring” value stocks.

Once in a while the old guys would pop their heads out to visit us young “studs” and try to impart their wisdom and experience on us. They warned that it would only be a matter of time until our tech bubble burst. But of course, we would just laugh at them and continued to buy stocks like Microsoft, Yahoo, AOL, Nortel, Motorola, and so on.

Early in 2000, my clients Microsoft investment was worth $5.8mm, and he came to me wanting to sell his shares since he was getting closer to retirement. Well long story short, after explaining about the huge taxes he would pay on his gains, and how Microsoft was an exception to the rule; it was way too big, too profitable, and too popular for a big downturn, he agreed that the stock was solid, and we didn’t sell. I guess you know the outcome. In case you don’t, in 2000 Microsoft lost 67% of its value faster than you can blink an eye. The stock then took 16 years to get back to its 2000 high. As for my client, he eventually sold in 2006 when his stock was worth $2.1mm. Still a great profit, but a very expensive lesson to learn. And for the other very popular stocks us “studs” at Merrill were trained to buy: AOL, YAHOO, MOTOROLA, NORTEL and more, I don’t think I need to tell you what those stocks are worth today.

In case you were wondering how those “boring” value stocks have done since 2000 in comparison to the rest of the market:

DFA’s US Value2000-20198.48% per year
S&P 500 Index2000-20196.05% per year
NASDAQ Index2000-20194.37% per year

Check out this chart to see the difference this meant on an initial investment of $500,000 back in 2000.

My real concern today is that I’m sensing a very similar behavior and attitude from investors. Too many people are just throwing money at these large cap growth names, thinking they can never come down, that they’re an exception to the rule, or somehow this time is different. Investors are abandoning the value stocks that have historically rewarded clients much more than growth stocks over the long term, with less risk.

Risk is measured as the probability that you won’t meet your financial goals. Our primary goal when investing on behalf of our clients has the exclusive objective of minimizing this risk. Based on my three decades of experience, living through six bear markets – and counting – I am certain there are few, if any, other investment disciplines that will help meet all our client’s financial goals than the one we follow at CJM.

Are you ready to experience the Human Side of Wealth?

Contact CJM today for a Complimentary Consultation.

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