Error by omission (of $1M)marcuss
I was 22, fresh out of university, when my father gave me US$5,000. It was left over from a college savings account, and the one condition of the gift was that I invest it.
Back then, newspapers (or, if you worked on a trading floor, a Quotron) were the way to check stock quotes. And to buy a stock through a “discount” broker (they weren’t cheap by today’s standards) you had to call in and place the order.
Armed with a liberal arts education that was heavy on writing, politics and history, and with a few months’ worth of scanning the Wall Street Journal under my belt, I figured I was ready to invest.
My first investment…
At the time, the shares of personal computer companies (which today are about as exciting as watching paint dry) were the high-growth tech darlings of the market. With five thousand big ones burning a hole in my pocket, I thought I’d get in on them.
My college buddy Simon, a tech and IT whiz who ingested computer magazines like air, told me his view of a few computer stocks.
One was Dell, which is (still) one of the industry heavyweights (it was taken private in 2013 and the stock is no longer traded). It was emerging as the industry leader. But it was a large-cap stock (at least that’s what it seemed then) and boring. At the time I thought it was “done” – and as a self-modeled early-stage contrarian, I wanted a stock that was a bit less obvious.
The other PC maker that Simon flagged, Zeos International, was a lot more exciting. From making its first PC in 1987, the company was named Fortune magazine’s fastest-growing public company in the U.S. in 1991. It beat Dell to the punch by rolling out laptops using the latest chip first. Zeos even had a palmtop pocket PC on the market.
The clincher? Simon told me that Zeos was a huge advertiser in the computer magazines that he read. Everywhere he looked, there was another page blaring the benefits of Zeos laptops and desktops. Even better, it was the first computer company to offer round-the-clock customer service – reflecting a strong commitment to the customer.
To my money-fevered brain, that could mean only one thing: An easy path to easy street once I multiplied my US$5,000 through picking stocks that increased in value.
So what happened?
In late 1991, Dell shares were trading at a (split adjusted) US$0.25 per share. By the end of the decade, the stock was changing hands at US$50. Had I done the obvious thing – which wasn’t obvious enough for me – my initial investment would have been worth US$1 million by the end of the decade.
Things didn’t go so well with Zeos. The business had peaked by the time I bought shares. In late 1994, Zeos was put out of its misery when it was acquired by another computer company – after Zeos had lost US$13 million on revenues of US$229 million in its most recent fiscal year.
“Analysts said it was not clear how Micron [the buyer of Zeos] … would resurrect Zeos, which has high costs in a low-margin business,” the New York Times reported at the time. Less than a year and a half later, Micron stopped making Zeos computers.
Zeos’ underlying problem was that – marketing messaging notwithstanding – it made terrible computers. According to a February 1996 article, a computer magazine survey had “… named Zeos as one of the worst in overall quality and service and among the poorest in reliability… Among the survey’s findings were that only a little more than half of Zeos customers responding to the survey said they would buy another Zeos computer… Zeos owners also said that, on average, it took more than 40 hours to get technical assistance via a telephone help line when they had trouble with their PCs.”
So much for 24/7 customer service being a good thing.
Months into my misadventure with Zeos – but before my US$5,000 was turned into a much, much smaller number – my “insider,” Simon, clarified his part of the investment thesis. The quality of the newsprint of the Zeos ads was inferior to the newsprint that other advertisers used in the industry magazines. So Zeos was advertising a lot – but taking the cheap way out.
At the time, my Zeos loss was a huge blow. It was an first expensive lesson, but not my last, as I’ve written before.
Learning from my mistake
I did learn a few things from that first investment mistake – lessons that I still have to sometimes remind myself of:
- Sometimes, being a contrarian isn’t worth the trouble. The opportunity cost of investing in Zeos rather than Dell was enormous. I thought I’d be victorious by not doing the obvious thing. Sometimes, the obvious thing is the best thing to do.
- Don’t invest in an industry you don’t understand. It’s like skipping through a minefield. Either stay away from companies in sectors that you don’t know as well as you know your spouse’s name – or find a good analyst who does.
- Rapid growth can be a bad thing. Zeos was growing fast, but quality suffered – and that was its downfall. Don’t be taken in by big revenue or profitability growth, because the underlying quality of the company’s product and operations is a lot more important.
- Right-in-front-of-your-eyes indicators can be misleading. Just because (for example) there are lots of cars in the supermarket parking lot doesn’t mean the supermarket is making money – it might mean that their prices are too low to make a good margin. And a lot of ad pages, on cheap newsprint, might mean that a poorly managed company is trying to grow out of its quality problems.
- Quality matters. In the end, if you produce a lousy product, people won’t buy it from you. That’s all there is to it.
I’ve made a lot more mistakes since Zeos. But I hope I haven’t repeated these. And I hope you don’t, either.