Monday, January 20, 2014

How Not to Invest

If you accused me of talking up successes and ignoring failures in my investment posts you would be largely correct. Investing is like golf. You need to think positively. Don't think about not hitting the ball in the water to the right; envision your ball landing safely in the fairway on the left. Don't hit the ball over the gaping sand trap in the front of the green; strike a solid shot to the green's center. 

Forget about what not to do. Sport psychologists say your subconscious focuses on the "to do" and forgets the preceding "not." If you are thinking I don't want to hit the ball in the water you pretty much doom your shot to a watery grave. For that reason, when I write about investing, mostly what I write about is what I've done well. I get better results thinking about making money than about not losing it. You probably will too.

That's not to say there is nothing to learn from the negatives. Get mad for a minute or two if you need to, but get over it. Whether it is investing, relationships, lifestyle, work or sports, when you bottom out, it is best to learn quickly -- think in terms of what could have been done better and different so the lesson can be brought forward. While there is no payoff in dwelling on failure, there is even less payoff in repeating it. But when it comes time to execute, see the shot you want to hit, the swing you want to make, or the return you want to earn, and execute accordingly.

Now let me talk about one of my most bone-headed investment moves, starting with the lame excuse that I had conjured in the beginning, an excuse that pretty much doomed the effort before I even started. The amount was $5,000. It wasn't much money I thought. I mean, $5,000 is a lot to spend.  It is plenty to make.  But not much to invest, right?  Well, I wasn't thinking clearly because that is a lot of money to waste.

It was 2008. My managed IRA money was in old-style tax-deferred IRA accounts that I had first opened in the 1980's. The way the numbers worked out in 2008 I was eligible to contribute $5,000 to an IRA. I contributed whenever I could. And I bought into the conventional thinking that a Roth IRA was the right choice, which doesn't shelter current income but excepts investment proceeds from income for all time. 

To start a Roth I needed to open new account. I realized that I probably would not be able add to the Roth IRA in subsequent years. So this was to be a one-shot deal. At the time, because of the market volatility, I was managing my other accounts day by day. But I convinced myself, under the circumstances, the best and easiest thing to do for this small account was to forget about market volatility. Don't waste my time managing $5K. This would be an invest it and forget it account.

With the aging of the Baby Boomer generation, the assisted living space seemed like a can't miss proposition. I chose Sunrise Senior Living as my primary Roth IRA investment. Sunrise was an industry leader, flooding affluent ZIP Codes with its mansion concept facilities.
McLean VA Sunrise Senior Living "Mansion"
Accounting irregularities had surfaced and beaten down the price of the stock, but it looked like the bad accounting affected timing of revenues and profits more than the ultimate amounts. 

I invested virtually the entire Roth IRA in Sunrise and tried to forget about it. The stock went down I noticed. It will come back I thought. The stock went down further. Oh, it will come back I thought again. The stock dropped further and further. In less than a year my $5,000 plummeted to less than $400, a decline of 93 percent.  It turned out that Sunrise had played the real estate bubble to get itself into a horrible mess in Europe; and in the U.S. it had started several high rise condo developments that became insolvent. Sunrise cratered, it seemed almost overnight, from industry leader to a leading candidate for bankruptcy.

I felt like a fool.  My tax shelter turned into a tax liability because Roth IRA losses were not deductible, and neither could they be used to offset capital gains earned elsewhere.

What were the lessons? I learned to diversify. I learned there is no such thing as invest it and forget it. And I learned to sell a stock in free fall. Then buy it back for less if I think it has a chance.

And I started paying close attention to Sunrise. And what I ultimately learned, most important of all, was that Sunrise was not likely to fold. Sunrise really was everything that I initially thought it was. It was merely a question whether and when Sunrise could get beyond its huge missteps. Over a period of months, reviewing SEC filings and press releases, listening to Sunrise's quarterly conference calls and carefully reviewing its financial statements, I concluded that Sunrise's lenders were in control and were working diligently to help it remain solvent. So I bought thousands of additional shares of Sunrise at a dollar and change in my other brokerage accounts.

The fall and rise of my Roth IRA.
I also held on to Sunrise in my Roth IRA account. The assisted living company's came back to the point that I sold my Roth holdings of Sunrise in the summer of 2012 for close to half their initial purchase price. I promptly used the proceeds to buy Facebook stock near its all time low. Now my Roth account balance is closing in on the initial investment; I may actually benefit from the Roth tax advantaged status some day.  

Effective January 9, 2013 Sunrise sold out to Healthcare REIT for $14.50 a share. We went out to dinner that night and had a nice little celebration. Good luck to all!


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