We’ve all made bad choices in life when it comes to money and even me, as a financial advisor, falls right into that category as well. Granted, I’ve learned a lot of what to do, but that still doesn’t mean I haven’t made my share of mistakes when it comes to investing.
Everyone has some kind of “worst investment ever” story and that goes for just about every other financial advisor too. Believe it or not, we tend to think we’re really smart and only pick winners when it comes to investments—but, bold brutal truth, we’re not. If your financial advisor is telling you differently, then I’d start looking for another one.
We are human just like you and we’ve been known to make a mistake or two when it comes to picking winners. While I probably shouldn’t say this for sake of losing credibility (but you know if you’ve ever read my blog that I’m brutally honest), I fall into the same category and have made a few wrong investment calls in my life.
However, today, you only get to hear about one and it’s the one I consider the worst. So without further ado, let’s jump into my worst investment ever. You’ll have to entice me to divulge any others.
It was early 2006. Things were going well in the economy, the stock market was growing and the housing market, as we all know, seemed like it would never stop going up.
I had just purchased my first home about a year prior and was working for a company where we managed retirement plans for municipalities along with financial planning for the individual employees. A much different place than where I’m at right now, but still in a financial consultant capacity.
I had always been an avid reader of Kiplinger Magazine and ran across an article that, if I remember correctly, was going over the track record of various investment newsletters. The types of newsletters that made specific recommendations to their readers on various investment opportunities in stocks, preferred stocks, REIT’s, bonds, etc.—just about any investment you could think of.
One of the publications caught my eye so I decided to do a little more research and eventually signed up for a 12-month subscription shortly thereafter. For the life of me, I can’t remember the name of the publication, however, it recommended a lot of individual stocks along with preferred stocks. They were very much into dividend yielding type investments.
After doing some research after reading a few issues, I decided to invest in a three of four stocks they were recommending. While I can’t exactly remember what the other stocks were, one of them was definitely my worst investment ever. The name of that stock, or rather real estate investment trust: Thornburg Mortgage.
They were located in the southwest and were a lender for jumbo loans—if you remember what happened to the housing market, particularly in that region, then you already that things are about to go bad really fast. However, it had a great yield, appeared to be pretty stable, had good management, etc.
By this time, it was now mid-2007 and the stock had done pretty well right alongside the stock market and housing market. But, oh boy was I in for a treat come that fall. Since my recollection is a little cloudy from it being 10 years ago, and I’ve tried to wash it out of my memory, I’m going to give you the exciting news from Wikipedia.
”On August 7, 2007, an analyst with Deutsche Bank downgraded Thornburg Mortgage to "Sell", based upon concerns that the company could be faced with increasing margin calls despite the high rating of its mortgage backed securities. Beginning August 9 these same securities experienced a "sudden and unprecedented" decline in value, along with an increase in margin calls. In response, during the week beginning August 13 the company stopped accepting loan applications, sold US$20.5 billion of its mortgage backed securities portfolio (in doing so incurring a capital loss of US$930 million), mitigated the potential for margin calls by reducing its repurchase borrowings and delayed payment of a previously announced stock dividend from August 15 to September 17. The company's stock price closed 47% lower when the delayed dividend payment was announced on August 14…”
Okay, let’s stop there for a moment. This is when I probably should have known things weren’t going well and management knew that “stuff” was about to hit the fan. However, my newsletter was providing updates that comforted me so I continued to hold on. Let’s get back to Wikipedia.
“…but over the next few days, it regained most of those losses. A couple of weeks later, the company also raised US$500 million through a preferred share offering, a move described as "a desperate attempt to stay afloat", and began accepting applications again.”
Alright, so things might not be as bad and maybe there is a light at the end of the tunnel. Throughout the rest of 2007 and into 2008, there certainly was more volatility but it appeared things were just going to be a little bumpy with everything else happening in the market at that time. Let’s fast forward to March of 2008.
”On March 7, the company announced that it would be restating its 2007 financial results, and also that as of the previous day it had US$610 million in outstanding margin calls, a much greater amount than cash available. Financial analysts speculated that the company may need to seek bankruptcy protection.”
Okay, so that certainly isn’t good news and I probably should have seen the writing on the wall at this point. However, I made the mistake that so many investors make and just kept holding on instead of cutting my losses.
“Thornburg Mortgage indicated on March 19 that it had reached an agreement with five of its creditors which stopped additional margin calls for one year but included several conditions, the most urgent of which was to raise US$948 million within seven business days. The five creditors were identified as Bear Stearns, Citigroup, Credit Suisse, Royal Bank of Scotland and UBS. The company further confirmed that without the additional capital it may have to file for bankruptcy protection The funding was to be raised through the sale of convertible notes. Having initially been scheduled for March 20, the company pushed back the sale until March 24.”
While I know this story has you at the edge of your seat, I will fast forward to April 2009 where they finally put me out of my misery and officially filed for bankruptcy. Long story short, my initial investment basically went to zero, hence a pretty good reason why this is my worst investment ever.
Looking back on this and just recollecting now, there were a lot of red flags. Regardless, there are still some things we can take away from this so none of us make this mistake again.
Hopefully, this makes you a feel a little better to know even a financial advisor makes some mistakes every once in a while. I rarely invest in any individual stocks anymore because of this one incident, and mainly stick to ETF’s, index funds, and mutual funds. When you’re thinking about some hot stock to put your hard earned money into, please think of this story and maybe give it a second thought.
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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