My Worst Damn Investing Experience Period! (Part Two)

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Elisabeth Kubler-Ross, a Swiss MD, came to the US in the late 1950s. She worked in a New York hospital and was horrified with how the dying patients were treated. Most were shunned and treated with a profound lack of respect. So she sat down and listened to them, and eventually started giving lectures on what they were telling her. This culminated in her classic book, On Death and Dying (1969) in which she outlined a 5-stage model on death and grief. Although the model is based on anecdotal evidence (not exactly air-tight from a “science” perspective…whatever the heck that means), I think it can be useful in helping us understand any kind of loss. In Part Two of My Worst Damn Investment Experience, Period! I’m going to apply the model to my shellacking at the hands of Laidlaw (click here for Part One). Let’s begin with the stage you know, you love, you can’t live without…

1. Denial

If you’re ever looking to get away from it all, especially the truth, take the vacation that is denial. Of all the stages of grief, this one has received the most empirical support. It involves trying to tell ourselves that nothing has changed and that all the bad stuff can’t be happening. While Laidlaw was going down, I ordered up one dandy dose of denial. Like so many others who have been burned, I stopped looking at the stock quote. And when the carnage was over, I acted as if it never happened. I didn’t tell anyone, not so much because I didn’t want them to know. It was more a matter of failing to acknowledge it myself.

The Market Guy has used denial after each of the following situations:

  • Rick Monday’s game five home run off Steve Rogers, eliminating the Expos from the 1981 playoffs. This was my first sports trauma.
  • Seeing the horrendous Highlander 2. To this day, I will never understand what Sean Connery was thinking when he agreed to be involved.
  • Being in grade 7 and having a group of grade 8’s laughing at my pants. They were not flood pants. I was not wearing flood pants. No flood pants. Understand?

The denial also affected how I interpreted (or failed to interpret) all the bad news that kept coming and coming and coming in the months leading up to the bankruptcy filing. I decided not to think about it. As always, make sure to test-drive some denial first, just to make sure you like it. If it breaks down, you can always have some fun with…

2. Anger

In this stage, you’re angry at the person(s) who inflicted the hurt or at the world, for letting it happen. Sometimes you’re angry with yourself for letting the event take place, even if, realistically, nothing could have stopped it. Given the prevalence of the Laidlaw logo around town, I had many opportunities to express my anger. I especially enjoyed my expletive-filled tirade when a Laidlaw bus cut me off on campus. It was a modern version ofGeorge Carlin’s Seven Words You Can’t Say on Television. OK, so I muttered the whole thing and never really yelled. But it was satisfying nonetheless.

In the anger stage, Elisabeth Kubler-Ross (shown here) would have mowed down the daisies had she owned Laidlaw like the Market Guy  

I was angry with management and also used a number of colourful descriptors when discussing them and their descendants. They misrepresented the facts and I regard them as nothing more than financial pirates, right up there will the motley assortment of characters we’ve seen over the past year being dragged away in handcuffs. OK, so I’m experiencing some anger residue. Note that it’s possible to move back-and-forth between stages. Finally, I was angry with myself, especially for what I did during the stage of…

3. Bargaining

Sometimes we try to bargain our way out of the negative situation. Often we enlist the services of a higher power…the “please (insert your favourite deity here) I’ll be a better person if you help me out of this jam” strategy. Although I didn’t pray, I did sing the song of the investing junkie: dollar-cost averaging. The idea is that if you buy more at a lower price, this will reduce the average cost. In the beginning of 2000, I added shares at $4.54 and then again at $1.70. Yes, I was trying to catch a falling knife and I was getting cut up bad. The stock was becoming increasingly volatile and some active trading recouped some of the losses. But the stock eventually continued its shameful march to zero and I maintained at least a portion of the position until mid-2001 and a final trade price of, get this, $0.55. I barely ended up with a dollar with my dollar-cost averaging.

In behavioural finance we speak of investors treating gains and losses quite differently. Recent Nobel prize winner Daniel Kahneman and the late Amos Tversky developed prospect theory which stated that when faced with a gain, people seek to minimize risk. That is, they do what is necessary to protect the gain. Conversely, when faced with a loss, people are willing to assume extra risk to try and reduce the loss. They will do this even if it means throwing good money after bad. Why do we do such irrational things? Well, it owes much to the fact that while we really enjoy our gains, we really, really, really, really dislike our losses. I suppose it’s a case of pain being more powerful than pleasure. In my dealings with Laidlaw, I behaved like a behavioural finance cliché.

When I finally eliminated the holding, I spent more in trading commissions than I received from the sale. Although this sounds irrational, if the stock went to zero (and it did), Laidlaw would have been etched for eternity on my account statements and I would have to pay my broker a fee to remove the stain. You might as well send me to the showers in the third season of the prison drama, Oz. I wonder how many people have Bre-X on their statements? Any of you long Air Canada? Watch it, Pedro. Because if you do, get ready for some…

4. Depression

“Like a fool, I fell in love with you, turned my whole world upside down…Laidlaw”  

-As always, Clapton speaks the gospel

 

This reaction is, well, depressing. You feel numb, and the activities you used to enjoy no longer excite you. Typically there is a change in appetite and sleeping behaviour. Being in the field of psychology, I’ve taken many tests that are designed to capture aspects of my personality. Someday they’ll discover that personality tests cause cancer and then I’m really screwed. Among the findings that consistently emerge is that I have an optimistic way of looking at the bad stuff that happens. So I missed the depression stage completely.

Besides, the portfolio outperformed the Dow by over 20% in 2001 and 33% in 2002. In other words, the context didn’t allow for much self-loathing and made compartmentalizing the loss much easier. It was kind of like dating a girl that treats you like crap, getting dumped, and then finding yourself in a beach house with Uma Thurman on spanish fly. As always, such things really aid in…

5. Acceptance

“Let’s make the best of the situation, before I finally go insane…”  

-Clapton brings us home

 

In this stage, we realize life has to go on. The anger and sadness have tapered off and we start to accept the reality of the loss. It’s a time of retrospection and hindsight. As part of the process, I initiated what social psychologists call, the attributional search. That is, I started asking the “why” question; as in, why did this happen? What could I have done differently? Keeping in mind, of course, that sometimes stuff just happens…

  • I didn’t have any limits on how much punishment I was willing to take. I should have limited my downside to something like 20%, sold out and then just moved on. It’s kind of like my 10-minute rule for new sitcoms. If I don’t laugh in the first 10-minutes, I’m not watching the show again for a long, long time.
  • As soon as we heard about accounting issues, that should have been my signal to get out of Dodge. Nothing good ever comes from accounting issues. There are so many other things to do with my money.
  • I should have been wary of the demographic arguments in favour of the company. These arguments have such intuitive appeal and it’s easy to be persuaded by “the population is aging, so there will be all these boomers buying this or that” line of reasoning. Makes for some great discussion, but investing is way more complex than that.
  • Beware the serial acquirer that takes on huge amounts of debt. Sometimes you need to eat what’s on your plate before grabbing seconds. I bought the stock in 1999 and at that time, few investors really cared about debt. It was all about growth in the top-line and who cared about the tab?
  • On the plus side, it reinforced my philosophy of never dedicating more than 5% of the portfolio to a new position. Saved my bacon here.

Laidlaw recently emerged from bankruptcy protection and has resumed trading on the TSX. No reaction from me. In fact, I knew my acceptance was secure when I received a request to participate in a class-action lawsuit against the company. My reaction? I couldn’t be bothered. I just don’t care anymore. Or maybe I’m just back in denial?

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. He just can’t see anything positive coming out of a Marlins-Yankees World Series. It’s like being asked to choose between having all your body hair pulled out and being hit in the groin with a steel-toe boot. Thank goodness for the NFL. There are always balls in the air at mail@marketguy.ca

My Worst Damn Investing Experience Period! (Part One)

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A couple of months ago, the Market Dad was over for dinner. Market Galhad just whipped up a tasty batch of a pasta dish affectionately known as “Almost, But Not Quite Lasagna.” The conversation turned to the experiment that is this column, about which Market Dad commented, “We’ll probably only hear about your winners.” So I started thinking, when is the last time I heard anyone speak of their losing investments? We rarely hear of the disasters, the wipeouts, the crash-and-burns. But if you’ve invested for any length of time and have exposed your capital to at least a moderate level of risk, you have war stories to tell. It’s strangely satisfying to sit down over a beer and talk about the bad old times. Everyone begins their story with, “so you think you lost money? Let me tell you about the time I got really slammed!”

Before we get too far into this, I have to tell you something: I hate losing money. I despise and loathe it. As any seasoned investor will tell you, it’s not just about the money. OK, it’s 90% about the money. However, many times it’s also about a failure in strategy. It sounded like a good idea at first, but then something went horribly wrong. Well, this column will provide a chance for me to purge my tank of investing misfortune.

If I’m going to come clean, I might as well come clean. My motives aren’t entirely pure. In fact, I’m being selfish, careful, and superstitious all at the same time. Although I was trained in the behavioural sciences, I can’t help but wonder if there are Market Gods, lords of the loonie, buddhas of the buck. If there are, I’m sure they pay attention and are quick to punish arrogance. That’s why traders consider it bad luck to brag about performance. It’s like the golfing buddy who is way too happy about his score. If he harps on it, you know the next round will be a stinker. In order to balance my account and keep me hitting the fairway, I’d like to tell you a story…the story of my worst damn investment experience, period. So crack open a cold one.

The whole sorry episode began in early 1998, with an initial purchase of shares in Laidlaw at $20.50; a price that will live in infamy. Here’s a company that began life in the 1950s as a trucking concern. By the early 1970s, the firm diversified by acquiring several school bus services. Then it was waste management. Remember all those garbage trucks that used to have the red, white, and blue Laidlaw logo on the side? Let me refresh your memory:

 

As far as my rods and cones are concerned, this might as well be a picture of the devil…or George Steinbrenner. But things were different in the 1990s, and the logo of Laidlaw was a mark of success. It was being added to ambulances, emergency rooms, and then inter-city buses via the purchase of Greyhound. Very different businesses to be sure, but they shared a common characteristic: Their respective markets were highly fragmented, with plenty of candidates for anyone interested in consolidation. Size has its privileges. The bigger you get, the more concessions you can wring from suppliers.

Laidlaw’s strategy was clear: growth by acquisition. And acquire they did, to the tune of several hundred smaller companies (38 in 1998 alone). Questions began to arise as to the focus of the company. In an annual report, the company responded:

“While Laidlaw’s businesses may appear quite different from each other, actually they have many common themes, practices and management techniques… All Laidlaw businesses provide services essential to the North American public. As a specialized transportation company, Laidlaw safely moves people, either as passengers or patients. In addition, Laidlaw-managed physicians extend patient care into the hospital emergency setting. Laidlaw is well placed to benefit from changing North American demographics – rising numbers of school-aged children and young adults, and aging baby-boomers with more time for vacations and an increasing need for healthcare services.”

Makes sense. Makes a lot of sense. Makes the acid come up my esophagus. However, it was hard to argue with success and most investors were regarding Laidlaw as a compelling growth story. With roughly 40% revenue and income growth in 1998, why should anyone have been concerned? The targets were being met and the valuation was reasonable given the growth rate.

To further the growth agenda, the company launched a $2 billion (US) takeover of chemical recycling company, Safety-Kleen. It seemed like a logical addition to Laidlaw’s waste management division, even if a fair amount of debt was involved. Laidlaw had no problem finding cash, as bankers were bending over backwards to keep the good times rolling. The company had momentum and the stock reflected it. It was all up, baby! Then we heard about some accounting problems at Safety-Kleen.

Much of what happened after that is a blur. There were a series of write-downs in the Safety-KLeen investment, but Laidlaw remained confident in the future. Take this from one of their announcements:

“We carry our investment in Safety-Kleen on our balance sheet at $738 million and in keeping with belief that there is substantial opportunity for Safety-Kleen’s stock value to appreciate, we expect to hold this interest for some time.”

Shortly thereafter, Safety-Kleen filed for bankruptcy and another $738 million was wiped away. However, the debt remained and there was a lot of it: Make it $4 billion to be exact. Now the bankers were decidedly less accommodative. Then we started hearing about margin squeezes and regulatory issues in the healthcare division. The company had momentum and the stock reflected it. Only this time, the momentum was downhill. “Can this company continue to grow at such a torrid pace?” was replaced by “Can this company meet it’s financial obligations?”

The answer to both questions was a resounding no. So in late 1999, I liquidated most of the position at $7.65. For those of you keeping score, that’s a 62.6% loss. Serious pain.

  “Laidlaw, you’ve got me on my knees, Laidlaw, I’m beggin’ darling, please!” 

-what Eric Clapton would have been singing, had he owed Laidlaw like theMarket Guy

However, this isn’t the end of the story. In Part Two I’ll tell you about how I made the situation (and my losses) much, much worse and what I learned in the process. “So you think you lost money? Let me tell you about the time I got really slammed!”

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. His new office has large windows, so he brought in a plant. Make sure to plant yourself withmail@marketguy.ca