My Worst Investments Of The Decade (Nortel, Bad Rental Property, Bad Decision On Navteq)

As 2009 comes to an end, a new year begins, and so does a new decade.  Evaluating ourselves and the decisions we made at the end of each year is critical for investing and life in general.  It allows us to learn and improve from our mistakes, as we target specific areas and mark them for improvement.  It also allows us to identify what has worked in the past and look to understand why.

Over the last two weeks I’ve been reviewing my personal investment decisions of 2009, as well as those made in the last few years. In the next two posts I’ll sharing my personal worst & best investment decisions that I have made this decade. I’ll start with my worst, and in the following post I’ll list my best.  Also, don’t forget to look out for my Investment & Economic Outlook 2010 article that will follow.

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Nortel Networks

The Investment:

I purchased Nortel Networks common shares at about $102 per share in 2000, just a few months prior to the tech crash.

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Circumstances:

Nortel Networks stock was the first investment I ever made. I was in the middle of university, and knew very little about investing, the stock market, economic history, or the company itself.  I purchased it on based on the premise that it was a good investment because professional money managers & analysts were recommending it, and many mutual funds offered by the banks held it.  Nortel was a huge technology success story and was mentioned in the news all the time, along with other technology companies. Everyone was talking about it and buying its stock, much like people do about RIM and Apple today.   The average DIY investors were saying “if you don’t buy it now, you’ll miss the train”, and “do you want to get left behind?”.  Since 1995, its stock price had doubled almost four times, with three 2:1 stock splits occurring! That translates into approximately a 1500% total return! People who had purchased the shares in 1995 were literally becoming millionaires within a few years from this one stock alone!  Not all, but the majority of my personal net worth (a few thousand dollars) was placed in this stock.

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What Happened:

The tech bubble burst and the global stock markets crashed.  The shares of Nortel plummeted along with the rest of the market.  I eventually sold all my shares of Nortel at about $3 in 2002. I had lost pretty much everything.  It was all the money I had earned in the last few years, working low paying summer student jobs.

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Impact & Additional Thoughts:

I had to start from scratch again.  The impact of this particular incident was heightened by the sudden passing of my father, which dramatically changed my family’s financial situation.  Speaking only of the financial loss, my family’s main income was gone.  In addition, my father’s retirement savings, like everyone else, was in technology mutual funds & stocks.  It was also wiped out along with the market crash.  Combined with my own financial losses, I was squeezed for additional money to cover expenses (in general) and the remaining 1/3 of my university expenses (my parents had helped pay for 1/3 before then).

The investment loss was definitely the main game changer. I realized that I needed to learn about investing, and never wanted to repeat the same mistake.  I started paying more attention to anything that would help me.  For example, my B.Comm courses (economics, finance, accounting, taxation, marketing) took on new meaning.  There were billionaires out there that managed to remain unscathed, and I wanted to be able to replicate their success.  I started reading books on investing, with one of the first general investing books being Rich Dad Poor Dad.  That trend eventually lead to reading Benjamin Graham’s Intelligent Investor, as well as university lectures on economic history.  I also realized the need to learn about other tools of investing, and explored investment areas other than mutual funds & stocks, such as corporate debt instruments, real estate, private investments, etc. It took a while before being financially able to start investing again.

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How Is The Investment Doing Today?

I no longer hold any Nortel shares. During this recent financial crisis, the company filed for bankruptcy protection again in early 2009.  It sold off major operating units (and is still selling more off), and was delisted from the stock exchange.  The shares’ last trade date was Jun 19 2009 at $0.185.

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Why Was It One Of The Worst?

I made a significantly large investment without knowing enough about investing in general, and about investing in stocks.  It was a big mistake to have invested before I had overhauled my personal finances.  I didn’t sit down and write a plan, and as a result there were no smaller strategies to achieve the plan (other investments, exit strategies, return rates needed, process, knowledge needed, worst case scenario, etc).  I lost everything at a time when money just happened to be needed the most!  That was absolutely the worst investment I made this decade, and so far in my life.  It was a 97% loss in the thousands!

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My First Rental Property

The Investment:

I purchased my first rental property in 2002-2003.  It was a small house (bungalow), approximately 50 years old, located outside of the metropolitan area, in the mid $100,000 range.

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Circumstances:

It was my first major investment outside the area of stocks & paper assets.  I had been interested in real estate for quite some time, which actually originated back to when I first read the book Rich Dad Poor Dad. After reading many real estate books and performing some investigation, I chose a specific area outside the city which provided opportunities for small first time investors.  The prices in the area on the smaller homes were much lower than that of those in the city, and they were continually bought & sold by a variety of investors.  Smaller ones would be sold off to newer investors, while mid sized ones would be sold to the those ready to move up from smaller ones. Similarly duplexes were bought by investors who sold their larger rental houses.  The area had small/mid/large sized houses, duplexes, triplexes, apartments, small mixed residential/commercial units, and small/mid sized commercial properties.  The area was a platform for starting, learning, and moving up as a real estate investor.  After comparing properties in the area for several months, one property was finally selected. I performed analysis, calculations, looked at rents in area, planned for upgrades, and performed the necessary due diligence before the property was purchased.

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What Happened:

The first year of operation was hell on earth.  This was despite upgrading safety aspects of the house, having actual leases, property management (after the first 6 months), regular maintenance service, lawn/snow contractors, interviews, and performing other due diligence. I had done the things that other local landlords in the area were notoriously known for not doing.  During the first year there was a flash thunder storm that flooded many houses in area, and caused city drains to back up.  Tenants complained and made threats regarding associated water damage and the temporary damp basement floor.  A few months later, during a period of heavy rain, water leaked in from a previously undetectable crack located behind drywall in the basement.  The weeping tiles were also broken, and the repair bill was huge.  Weather incidents aside, the tenants were horrible:
– domestic violence that required police involvement.
– complaints about everything.
– garbage issues (City notices, and fines issued to to me).
– noise issues from parties.
– damages (from domestic violence, parties, etc).
– constant need to keep an eye on them.
I received numerous complaints from neighbors (from both sides, back, and across the street) and lawsuits threats. After the first year, the contracts were not renewed and new tenants were found.  I had a much better experience with other tenants.

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Impact & Additional Thoughts:

The investment changed my life and attitude in many ways.  I experienced extremely high stress during the first year of operation (an understatement), and also a significant dent in finances as well (unexpected expenses from large repairs etc). I aged about 20 years in the first year of operation. Complacent landlords in the area had much better tenants and experiences, without doing as much due diligence.  Bad luck was a big factor, and I had much better luck with the other rental property. There was so many bad experiences, many of which shouldn’t have even been major issues.  They far outweighed any pleasant experience.

I gained more in knowledge/experience, than I did monetary wise. Experience was piled on in generous portions within a very short period of time. It was a crash course in dealing with people in general, from contractors/service providers of all types, government administration, police, neighbours, lawyers, and angry tenants.  I learned a lot in money management, aspects related to bank financing, aspects related to the physical building itself, time management, etc.

After the first year of operation my attitude towards investments changed. I thought considerably about the profit efficiency of investments in general.  After that point, I started to invest in assets that had the highest calculated probability of achieving the greatest return, with the lowest risk, and smallest effort.  Investments had to be efficient and posses all of these attributes.  This type of thinking resulted in a shift away from diversification strategies that most investors are drawn to and mutual funds advocate.  I focused on concentrating money into a smaller number of what were ranked the best investments candidates.  Today, this is especially reflected in my stock portfolio where it is concentrated in about 10 major holdings, and 5 minor ones.  In contrast, for the same amount of assets, the average investor may have more than 30 major holdings, and 15 minor ones.  Things that went wrong with the investment that were not under my control, made me think more about worst case scenario planning.  There was a need ensure or build-in something that allows an investment situation to still result in a positive outcome, if a serious unforeseen negative circumstance was to occur.  This further narrowed my investment criteria, and changed how I assessed actual risks.

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How Is The Investment Doing Today?

Over the years rising costs of energy, services, and taxes, and increased competition in the local area, resulted in a decision to sell while the price was high (low-mid $200).  I had another rental in the same area that was operating much better and worth more as well.  Comparing the numbers, the first property was not as good of an investment by a large margin, so it made sense to sell it.   The property was sold off in 2008, while the local area real estate market was still peaking.  The the peak estimated to be sometime in mid 2009 (in contrast to the real estate market in most areas, which had declined since early 2008).  Funds were moved into the stock portfolio to take advantage of the extremely low pricing available.

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Why Was It One Of The Worst?

The first year of operation alone overshadowed all the other years after it.  The overall (mental & monetary) experience turned out to be an overly unpleasant one, compared to my other rental property in the same area.  A huge amount of effort was put in, with a massive amount of stress and very little monetary gain in return.  Because real estate is less liquid, my capital was also locked up for a lengthy period of time while I was holding the property around. My only consolation was what I gained in knowledge and hands on experience.  There was definitely a more effective way to earn the same monetary return without that much effort. But I also wonder if there would have been an easier way to gain the same knowledge with far less pain.

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Navteq

The Investment:

I purchased Navteq common shares in early 2007 for about $30.

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Circumstances:

It was purchased with the intent of being an experiment in investing.  It was used to test a very common & popular investor belief/strategy that I’ve long been opposed to and do not believe to work, but the average investor continues to strongly believe. The belief/strategy is that because of market fluctuations, a stock’s price will fluctuate up & down repeatedly.  An investor sells a stock after a significant price increase, then waits for the price to fluctuate lower allowing the investor to repurchase the stock again.  The buy/sell process is continually repeated with the investor making profits.  Some investors refer to this in general as “trading” a stock, which is similar but different than what is commonly referred to as “day trading”. This approach is basically a simplified version of market timing.  The majority of average investors buy/sell by attempting to predict future market/stock price movements and time their buys/sells.  In this particular simplified strategy, investors do not even make predictions based on market outlook, economic conditions, or technical analysis.  Predictions are commonly made by looking at the price chart and attempting to predict a local maximum price (to sell at) and minimum price (to buy at).

I wanted to “trade” Navteq shares, selling after a quick profit with the intent of buying it back after a decline. At the time Navteq operated and dominated in pretty much a duopoly, with TeleAtlas being virtually the only other significant competitor.  Navteq shares were undervalued at the time, and the company was very profitable and growing at a rapid rate.

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What Happened:

When the stock appreciated 20% higher it was sold (another extremely popular investor strategy).  The price declined very slightly (a very small percentage) for a very short time.  It was not enough to repurchase according to the common strategy, and the shares then continued a slow climb.  On July 23 2007, Navteq’s competitor TeleAtlas was to be bought out in a surprise bid by GPS device maker TomTom.  Navteq shares continued to rise significantly, as rumors began to increase that Navteq could also be a take over target by TomTom rival Garmin.  The opportunity to repurchase at a relatively lower price than what I had sold it for, was eliminated.  In another surprise move, Nokia then bought out Navteq on Oct 1 2007, beating Garmin to the punch.  It sent the shares soaring to about $77.  Garmin subsequently entered a bidding war with TomTom for TeleAtlas on Oct 31 2007, and eventually lost.  Both TeleAtlas and Navteq stocks were taken off the market in a relatively short period of time.  I missed out on easy and very large profits due to the market timing and trading strategy that was being employed in the experiment.

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Impact & Additional Thoughts:

The experiment proved (with real money down) that the popular strategy did not work and that prices could not be timed.  It also showed that it can cut investors out of very profitable investments when they sell after price movements.  The large return that I would have gained, made the impact of the experiment’s results that much bigger.

The investment itself was not bad, just the approach that was being tested. It serves as a constant reminder that value investing and the concept of intrinsic value is the most sound investment approach. Since then I have used with success, the value investing and business valuation approach that Warren Buffett endorses.  Whenever anyone says they intend to sell after a price increase with the intent to repurchase at a slightly lower price (market timing). I try to convince them to pay attention to the value investing principles and the intrinsic value instead. I also use Navteq as a very good example.

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How Is The Investment Doing Today?

The chance to purchase Navteq shares, even at a higher price, was eliminated forever by the Nokia deal.  Nokia purchased Navteq for $77.97  per share on Oct 1 2007 ($8.1 Billion).

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Why Was It One Of The Worst?

It was not a good stock to experiment with because it was genuinely a really good investment.  What I should have done was select a random stock, and not one I actually wanted. I would have liked to keep Navteq in the portfolio, and not wasted on an experiment.  By going through the experiment I cut short an investment that would have otherwise returned 149%, if I used the value investing approach.  A return of 149% would have been thousands of dollars in profit!

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In the next posting, I’ll list the best investments that I have made this decade.

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Here is a list of books that will help you also avoid making some bad investment choices:

The Intelligent Investor (Benjamin Graham)
– Amazon.com Amazon.ca
[Amazon.com version includes preface by Warren Buffett]

The Snowball: Warren Buffett & The Business of Life (by Alice Schroeder)
– Amazon.com Amazon.ca

Making Money In Real Estate: The Canadian Guide To Profitable Investment in Residential Property (Douglas Gray)
– Amazon.ca

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Thanks & Happy Investing! — The Investment Blogger © 2010