There comes a time in every novice investor's life when he or she thinks they've found the Holy Grail.
The Holy Grail is an investment theory or investment method that seems devilishly clever and original to the novice investor.
One which gets them as excited as an archaeologist unearthing the tomb of Tut-Ankh-Amen.
And which they just can't wait to hang their hat on.
This investment 'find' could be any of a number of ideas.
From the Dogs of the Dow Theory authored by Michael O'Higgins.
To the Elliott Wave Theory popularized by Robert Prechter.
From Joel Blatt's Magic Formula.
To the Price to Sales Ratio which made Ken Fisher's 1984 book Super Stocks a best-seller.
The novice investor will suddenly come upon one of these ideas and allow it to agitate the gray cells for a while.
Then there's Warren Buffett.
For the novice investor, discovering Warren Buffett is something else altogether.
After all, he is one of the richest men in America.
And he is also recognized as one of the greatest investors of all time.
So no surprise that investors, novice and professional alike, become instant Warren Buffett groupies - hanging on to his every word, worshiping at the Berkshire Hathaway Annual General Meeting in Omaha, and dreaming of being a future Buffett.
This is where my sorry tale begins.
The Buffett Make-over
I was just as susceptible to the Buffett investing charisma as anyone else.
And after finding Buffett, I set out to remake myself in his image.
This meant reading books such as The New Buffettology. And The Warren Buffett Way.
And then getting down to business by applying essential Buffett principles.
Bottom-fishing was particularly appealing.
It allowed me to consider dog-house stocks such as Revlon, Rite Aid and Six Flags, which were all under $2 a share, maybe even under $1.
But not content with that, I searched for what I thought would be the quintessential Buffett pick - an out-of-favor and under-valued stock, the one that Mr. Market was idiotically shunning.
Enter Krispy Kreme Donuts.
I have never been much of a donuts fan.
But at the time, I discovered Krispy Kreme, I had become a heat-seeking Buffett missile in search of a target.
And Krispy Kreme Donuts (Ticker KKD) appeared to be the answer to my prayers.
Firstly, their cream and jelly filled donuts had become the new "delish" in donuts.
People were shunning their corner donut stores and trekking to Krispy Kreme stores instead.
Just Like Starbucks
In fact, they were even willing to stand in long lines to get their Krispy Kreme donuts.
Much as they do for Starbucks Frappuchinos and Lattes today.
And just like Starbucks, Krispy Kreme donuts were pricey.
All this had a distinctly Buffetesque aroma to me.
Reading Motley Fool articles like this one sealed the deal for me.
So when Krispy Kreme stock, which had stratospherically climbed to $40 a share, dropped overnight by 50% to $20 a share on a car-wreck of a quarter, I decided to lock in. And bought 100 shares.
There - I had bottom-fished. Just like my hero Warren Buffett. I couldn't have been more pleased with myself.
Or so I thought.
Fasten Your Seat-Belts
I was to find out (the painful way) that Krispy Kreme's 50% decline was just the beginning of its Drop-Zone like descent.
By the same time the next year, the stock had declined to $10 a share.
Giving my investment a 50% haircut.
$1,000 gone. Just like that.
Chastened and humbled, I took the loss and got out.
The Flight of The Bumblebee
I read somewhere that according to the Laws of Aerodynamics, a bumblebee should not be able to fly.
The bumblebee of course does not know this, so it flies anyway.
In much the same way, novice stock-pickers do not know that they don't know how to pick stocks.
So they pick stocks anyway.
Sometimes the picks pan out, sometimes they fall with a thud.
When that happens, some investors will never be able to psychologically recover from their mistakes and losses.
Others, phoenix-like, will rise from the ashes.
I am of the second kind. I was able to take my medicine and move on.
Are there rewards for naivety in investing?
Actually I was able to make lemonade out of this investing lemon.
I took my Krispy Kreme misadventure and turned it into a speech.
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| Photo Courtesy: Tanita Jha |
I won first place.
And took home a trophy.
Yes the mysterious Oscar looking thing you see at right is my Toastmasters International Speech trophy.
Now if only there had been some bling to go with that thing.
You know - Like maybe a 1000 dollars?
Oh Well...
If You Are Ever Stuck With a Lemon, See If You Can Make Some Lemonade Out of It :)
May You Invest Well in 2011 and Thrive!
Postscript: One of the best decisions I made in my life was to join Toastmasters and complete my CTM. Toastmasters helped me overcome the near fainting spells I would have when I had to get up and speak in front of even the smallest group of people. It's because of my Toastmasters experience that I picked up the courage to design and deliver a 3-Unit Money Workshop for 5th and 6th graders at a nearby elementary school. If you have a fear of public speaking, I highly recommend Toastmasters. Want to know more about Toastmasters? You can read about it here. Want to know more about Adlibmasters, which is the Toastmasters club that I joined? You can read about that here.
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