Last night I had dinner in San Francisco with J.D. , his lovely wife, and Cap  and we somehow got on the topic of how JD made the fantastically not awesome decision to buy Sharper Image . Cap lamented about how he was poor and didn’t invest in stocks (to be honest, I forgot what he said so I put in a typical Cap comment :)), I chimed in about how I erroneous Worldcom (I said Enron earlier but I got the two mixed up ) on bad news but that it was a good lesson for me.
That got me thinking to something my father told me many years ago. He said, and I’m paraphrasing, that you either learn a lesson in the classroom or you learn it in real life, the one in real life is far more expensive (in both time and money) and dangerous. The best analogy I can think of were the “fights” I saw on the fraternity quad in college. Ever see two “tough guys” step up to each other, bump chests, and challenge each other? That, in part, goes back to when people would fight for territory and weakness meant someone else was going to swoop in on your livelihood.
On the fraternity quad of a private engineering school, you probably didn’t learn the lessons of the street growing up and probably didn’t realize that if you bumped up against the wrong chest, you’d be floored. In the fraternity quad of a private engineering school, the chest puffing stopped at just that, chest puffing.
Then my friend Howard from New York City showed up, a real cool Asian kid who stood all of 5′ 7″, but he had street smarts; where he came from, chest puffing and “go ahead, hit me” statements were soon followed by the very thing you asked for. One night he had a run in with some punk, there was shouting, some “go ahead, hit me”s were thrown around, and he swung. The guy didn’t fight back, but bless his bravado, he said “hit me again!” And he did. And again. Until the guy ran. (He later returned with five of his fraternity brothers, at which point we called him a [not nice name] and told him to [go home])
That other guy, he got a lesson he should’ve learned in the classroom – don’t pick a fight if you aren’t going to fight. Howard used his fists, depending on the street and the circumstances, it could’ve been clubs, knives or guns. The other guy got off cheap.
After that little trip down memory lane, it struck me, losing money on Worldcom was very good for me. At the time it was catastrophic, a loss of a thousand dollars in a Roth IRA that had only three or four; but it taught me that I really need to do a lot more due diligence before I’d be ready to invest any money in individual stocks. Due diligence is not an hour reading news stories, due diligence is poring over financial records, understanding how markets price stocks (biggest lesson is that it’s about growth, not intrinsic value; don’t quote me though because I’m terrible at investing), and a whole pantheon of factors I can’t even begin imagine, let alone enumerate. That’s precisely why I like index funds (though I’m waiting for the research that says index funds suck, you know it’s coming!).
That thousand dollars has probably saved me countless dollars over the years since and it definitely was the main reason why I didn’t buy Bear Stearns  this past month.
Those who cannot remember the past are condemned to repeat it.
— George Santayana , Reason in Common Sense